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Bank Capital Requirements and Bank Lending: From Theory to Empirics to Policy

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  • Bahaj, Saleem
  • Lattanzio, Chiara
  • Malherbe, Frédéric

Abstract

Macroprudential regulation is often viewed as a trade-off between banking system stability and aggregate credit supply. In this paper, we provide a comprehensive analysis of how changes in capital requirements affect bank lending. We use a theoretical framework to assess and nuance the trade-off. We show that imperfect competition, general equilibrium effects, and asset heterogeneity among banks result in lending responses that are complex and difficult to estimate. Armed with these theoretical insights, we assess existing strategies in the empirical literature and provide guidance for future research.

Suggested Citation

  • Bahaj, Saleem & Lattanzio, Chiara & Malherbe, Frédéric, 2025. "Bank Capital Requirements and Bank Lending: From Theory to Empirics to Policy," CEPR Discussion Papers 19942, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19942
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    File URL: https://cepr.org/publications/DP19942
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