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

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

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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