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The Real Effects of Bank Capital Requirements

  • Brun , Matthieu


  • Fraisse , Henri


  • Thesmar , David


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.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 988.

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Length: 34 pages
Date of creation: 04 Jul 2013
Date of revision:
Handle: RePEc:ebg:heccah:0988
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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