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The Real Effects of Bank Capital Requirements

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  • Brun , Matthieu

    ()

  • Fraisse , Henri

    ()

  • Thesmar , David

    ()

Abstract

We measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loan-level data and take advantage of the transition from Basel I to Basel II. While under Basel I the capital charge was the same for all firms, under Basel II, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: A 1 percentage point decrease in capital requirement leads to an increase in loan size by about 5%. At the firm level, borrowing also responds strongly although a bit less, consistent with some limited between-bank substitutability. Investment and employment also increase strongly. Overall, because the transition to Basel II led to an average reduction by 2 percentage points of capital requirements, we estimate that the new regulation led, in France, to an increase in average loan size by 10%, an increase in aggregate corporate lending by 1.5%, an increase in aggregate investment by 0.5%, and the creation or preservation of 235,000 jobs.

Suggested Citation

  • Brun , Matthieu & Fraisse , Henri & Thesmar , David, 2013. "The Real Effects of Bank Capital Requirements," HEC Research Papers Series 988, HEC Paris.
  • Handle: RePEc:ebg:heccah:0988
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    References listed on IDEAS

    as
    1. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
    2. 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.
    3. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Bank capital ratios; Bank regulation; Credit supply;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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

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