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Bank capital ratios and the structure of nonfinancial industries

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Abstract

We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance sheet pressures manifested through changes in capital ratios on employment in the manufacturing sector. For industries dependent on external finance, we find that an increase in the capital ratio has no statistically significant effect on net firm creation, but has an economically significant impact on average firm size, as measured in the number of employees. Our findings indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable adverse impact of balance sheet pressures on employment in industries dependent on external sources of funding. Our results highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such as Basel III, may have on nonfinancial firm dynamics.

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  • Seung Jung Lee & Viktors Stebunovs, 2012. "Bank capital ratios and the structure of nonfinancial industries," Finance and Economics Discussion Series 2012-53, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2012-53
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    Cited by:

    1. Chang, Su-Hsin & Contessi, Silvio & Francis, Johanna L., 2014. "Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 78-106.
    2. Haltenhof, Samuel & Jung Lee, Seung & Stebunovs, Viktors, 2014. "The credit crunch and fall in employment during the Great Recession," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 31-57.

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