Bank Capital Ratios and Employment in Nonfinancial Industries

51 Pages Posted: 20 Mar 2012 Last revised: 21 Oct 2012

See all articles by Seung Jung Lee

Seung Jung Lee

Board of Governors of the Federal Reserve System

Viktors Stebunovs

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: September 17, 2012

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.

Keywords: bank capital ratios, bank capital regulation, employment, non-financial firm dynamics

JEL Classification: G21, G28, G30, J20, L25

Suggested Citation

Lee, Seung Jung and Stebunovs, Viktors, Bank Capital Ratios and Employment in Nonfinancial Industries (September 17, 2012). Available at SSRN: https://ssrn.com/abstract=2024705 or http://dx.doi.org/10.2139/ssrn.2024705

Seung Jung Lee

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Viktors Stebunovs (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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