IDEAS home Printed from https://ideas.repec.org/p/dnb/dnbwpp/467.html
   My bibliography  Save this paper

Effect of bank capital requirements on economic growth: a survey

Author

Listed:
  • Natalya Martynova

Abstract

This paper reviews studies exploring how higher bank capital requirements affect economic growth. There is little evidence of a direct effect; research focuses on the indirect effects of capital requirements on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth. Banks facing higher capital requirements can reduce credit supply as well as decrease credit demand by raising lending rates which may slow down economic growth. However, having better-capitalized banks enhances financial stability by reducing bank risk-taking incentives and increasing banks' buffers against losses.

Suggested Citation

  • Natalya Martynova, 2015. "Effect of bank capital requirements on economic growth: a survey," DNB Working Papers 467, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:467
    as

    Download full text from publisher

    File URL: https://www.dnb.nl/en/binaries/Working%20paper%20467_tcm47-319679.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
    2. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.
    3. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
    4. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    5. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    7. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    8. Claudia M. Buch & Esteban Prieto, 2014. "Do Better Capitalized Banks Lend Less? Long-Run Panel Evidence from Germany," International Finance, Wiley Blackwell, vol. 17(1), pages 1-23, March.
    9. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
    10. Francis, William B. & Osborne, Matthew, 2012. "Capital requirements and bank behavior in the UK: Are there lessons for international capital standards?," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 803-816.
    11. Matthieu Brun & Henri Fraisse & David Thesmar, 2013. "The Real Effects of Bank Capital Requirements," Working Papers hal-02011435, HAL.
    12. Thakor, Anjan V. & Furlong Wilson, Patricia, 1995. "Capital requirements, loan renegotiation and the borrower's choice of financing source," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 693-711, June.
    13. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    14. Natalya Martynova & Lev Ratnovski & Razvan Vlahu, 2014. "Franchise value and risk-taking in modern banks," DNB Working Papers 430, Netherlands Central Bank, Research Department.
    15. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
    16. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
    17. Aiyar, Shekhar & Calomiris, Charles W. & Hooley, John & Korniyenko, Yevgeniya & Wieladek, Tomasz, 2014. "The international transmission of bank capital requirements: Evidence from the UK," Journal of Financial Economics, Elsevier, vol. 113(3), pages 368-382.
    18. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
    19. Michael R King, 2010. "Mapping capital and liquidity requirements to bank lending spreads," BIS Working Papers 324, Bank for International Settlements.
    20. Hancock, Diana & Wilcox, James A., 1998. "The "credit crunch" and the availability of credit to small business," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 983-1014, August.
    21. Beltratti, Andrea & Stulz, René M., 2012. "The credit crisis around the globe: Why did some banks perform better?," Journal of Financial Economics, Elsevier, vol. 105(1), pages 1-17.
    22. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
    23. Aiyar, Shekhar & Calomiris, Charles W. & Wieladek, Tomasz, 2016. "How does credit supply respond to monetary policy and bank minimum capital requirements?," European Economic Review, Elsevier, vol. 82(C), pages 142-165.
    24. Santos, Joao A. C., 1999. "Bank capital and equity investment regulations," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1095-1120, July.
    25. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    26. Delis, Manthos D. & Tran, Kien C. & Tsionas, Efthymios G., 2012. "Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus," Journal of Financial Stability, Elsevier, vol. 8(2), pages 57-68.
    27. Klomp, Jeroen & Haan, Jakob de, 2012. "Banking risk and regulation: Does one size fit all?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3197-3212.
    28. Jean-Stéphane Mésonnier & Allen Monks, 2015. "Did the EBA Capital Exercise Cause a Credit Crunch in the Euro Area?," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 75-117, June.
    29. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
    30. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    31. Gabriel Jimenez & Steven Ongena & Jose-Luis Peydro & Jesus Saurina, 2012. "Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications," American Economic Review, American Economic Association, vol. 102(5), pages 2301-2326, August.
    32. Ashcraft, Adam B., 2006. "New Evidence on the Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 751-775, April.
    33. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    34. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    35. Fraisse, Henri & Lé, Mathias & Thesmar, David, 2017. "The real effects of bank capital requirements," ESRB Working Paper Series 47, European Systemic Risk Board.
    36. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
    37. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
    38. Patrick Slovik & Boris Cournède, 2011. "Macroeconomic Impact of Basel III," OECD Economics Department Working Papers 844, OECD Publishing.
    39. Ugo Albertazzi & Domenico J. Marchetti, 2010. "Credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman," Temi di discussione (Economic working papers) 756, Bank of Italy, Economic Research and International Relations Area.
    40. Bridges, Jonathan & Gregory, David & Nielsen, Mette & Pezzini, Silvia & Radia, Amar & Spaltro, Marco, 2014. "The impact of capital requirements on bank lending," Bank of England working papers 486, Bank of England.
    41. Aiyar, Shekhar & Calomiris, Charles & Hooley, John & Korniyenko , Yevgeniya & Wieladek, Tomasz, 2014. "The international transmission of bank capital requirements: evidence from the United Kingdom," Bank of England working papers 497, Bank of England.
    42. Demirgüç-Kunt, Asli & Detragiache, Enrica, 2011. "Basel Core Principles and bank soundness: Does compliance matter?," Journal of Financial Stability, Elsevier, vol. 7(4), pages 179-190, December.
    43. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
    44. Noss, Joseph & Toffano, Priscilla, 2014. "Estimating the impact of changes in aggregate bank capital requirements during an upswing," Bank of England working papers 494, Bank of England.
    45. C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements.
    46. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Haselmann, Rainer & Krahnen, Jan Pieter & Wahrenburg, Mark, 2019. "Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise," SAFE Policy Reports 1, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. repec:bog:econbl:y:2016:i:43:p:19 is not listed on IDEAS
    3. repec:eee:macchp:v2-2263 is not listed on IDEAS
    4. repec:bog:econbl:y:2016:i:43:p:19-29 is not listed on IDEAS
    5. Xiong, Wanting & Wang, Yougui, 2017. "The impact of Basel III on money creation: A synthetic analysis," Economics Discussion Papers 2017-53, Kiel Institute for the World Economy (IfW).
    6. Ambrocio, Gene & Jokivuolle, Esa, 2017. "Should bank capital requirements be less risk-sensitive because of credit constraints?," Research Discussion Papers 10/2017, Bank of Finland.
    7. Annalisa Bucalossi & Antonio Scalia, 2016. "Leverage ratio, central bank operations and repo market," Questioni di Economia e Finanza (Occasional Papers) 347, Bank of Italy, Economic Research and International Relations Area.
    8. Ferrari, Stijn & Pirovano, Mara & Rovira Kaltwasser, Pablo, 2017. "The impact of sectoral macroprudential capital requirements on mortgage lending: evidence from the Belgian risk weight add-on," MPRA Paper 80821, University Library of Munich, Germany.
    9. repec:bog:econbl:y:2016:i:43:p:55-75 is not listed on IDEAS
    10. repec:bog:econbl:y:2016:i:43:p:55 is not listed on IDEAS
    11. Cappelletti, Giuseppe & Peeters, Jonas & Budrys, Žymantas & Varraso, Paolo & Ponte Marques, Aurea, 2019. "Impact of higher capital buffers on banks’ lending and risk-taking: evidence from the euro area experiments," Working Paper Series 2292, European Central Bank.
    12. repec:eee:jbfina:v:94:y:2018:i:c:p:297-314 is not listed on IDEAS
    13. Dunz, Nepomuk & Naqvi, Asjad & Monasterolo, Irene, 2019. "Climate Transition Risk, Climate Sentiments, and Financial Stability in a Stock-Flow Consistent approach," Ecological Economic Papers 6911, WU Vienna University of Economics and Business.
    14. repec:bog:econbl:y:2016:i:43:p:7 is not listed on IDEAS
    15. repec:eee:jfinin:v:35:y:2018:i:pb:p:17-29 is not listed on IDEAS
    16. repec:bog:econbl:y:2016:i:43:p:31-53 is not listed on IDEAS
    17. repec:nbb:reswpp:201606-306 is not listed on IDEAS
    18. repec:bog:econbl:y:2016:i:43:p:31 is not listed on IDEAS
    19. Gambacorta, Leonardo & Shin, Hyun Song, 2018. "Why bank capital matters for monetary policy," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 17-29.
    20. Stijn Ferrari & Mara Pirovano & Pablo Rovira Kaltwasser, 2016. "Systemic risk, macroprudential policy, bank capital requirements, real estate," Working Paper Research 306, National Bank of Belgium.
    21. repec:zbw:ifweej:201841 is not listed on IDEAS
    22. repec:bog:econbl:y:2016:i:43:p:7-17 is not listed on IDEAS

    More about this item

    Keywords

    bank capital requirement; credit growth; financial stability; economic growth; cost of equity;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:467. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Heuver). General contact details of provider: http://edirc.repec.org/data/dnbgvnl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.