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Do regulations and supervision shape the capital crunch effect of large banks in the EU?

Author

Listed:
  • Malgorzata Olszak

    (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland)

  • Mateusz Pipien

    (Department of Econometrics and Operations Research, Cracow University of Economics, Poland)

  • Iwona Kowalska

    (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland)

  • Sylwia Roszkowska

    (University of Warsaw, Faculty of Management)

Abstract

This paper extends the literature on the capital crunch effect by examining the role of public policy for the link between lending and capital in a sample of large banks operating in the European Union. Applying Blundell and Bond (1998) two-step robust GMM estimator we show that restrictions on bank activities and more stringent capital standards weaken the capital crunch effect, consistent with reduced risk taking and boosted bank charter values. Official supervision also reduces the impact of capital ratio on lending in downturns. Private oversight seems to be related to thin capital buffers in expansions, and therefore the capital crunch effect is enhanced in countries with increased market discipline. We thus provide evidence that neither regulations nor supervision at the microprudential level is neutral from a financial stability perspective. Weak regulations and supervision seem to increase the pro-cyclical effect of capital on bank lending.

Suggested Citation

  • Malgorzata Olszak & Mateusz Pipien & Iwona Kowalska & Sylwia Roszkowska, 2015. "Do regulations and supervision shape the capital crunch effect of large banks in the EU?," Faculty of Management Working Paper Series 32015, University of Warsaw, Faculty of Management.
    • Handle: RePEc:sgm:fmuwwp:32015
    as

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    File URL: http://www.wz.uw.edu.pl/portaleFiles/5630-Faculty%20of%20M/WP/UW_FM_WPS_3_2015.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    capital ratio; lending; capital crunch; regulations; supervision; procyclicality;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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