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Bank response to higher capital requirements: Evidence from a quasi-natural experiment

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Listed author(s):
  • Gropp, Reint
  • Mosk, Thomas
  • Ongena, Steven
  • Wix, Carlo

Abstract

We study the impact of higher capital requirements on banks' balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.

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Paper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 156.

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Date of creation: 2016
Handle: RePEc:zbw:safewp:156
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Keywords: Bank capital ratios; Bank regulation; Credit supply;

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Find related papers by 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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  23. 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.
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Cited by:

  1. Acharya, Viral V & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2017. "Whatever it takes: The Real Effects of Unconventional Monetary Policy," CEPR Discussion Papers 12005, C.E.P.R. Discussion Papers.
  2. 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.
  3. Acharya, Viral & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2017. "Whatever it takes: The real effects of unconventional monetary policy," SAFE Working Paper Series 152, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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