Bank Capital Ratios and the Structure of Nonfinancial Industries
46 Pages Posted: 11 Dec 2011
Date Written: December 9, 2011
We exploit variation in commercial bank capital ratios across states to identify the impact of higher capital ratios on the creation and size of manufacturing firms. 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. The number of firms might not necessarily decline as displaced workers may incorporate new businesses cheaply. Our results highlight the potential effects that tightening capital adequacy standards, such as Basel III, may have on firm dynamics.
Keywords: bank capital ratios, bank capital regulation, non-financial firm dynamics
JEL Classification: G21, G28, G30, J20, L25
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