The Real Effects of Higher Capital Requirements: Evidence from Danish Firm-Level Data
33 Pages Posted: 25 Aug 2013 Last revised: 28 Jul 2015
Date Written: June 30, 2015
This paper considers how increases in individual banks’ capital requirements affect borrowing and growth at the firm-level. Using a novel data set of regulatory injunctions to Danish banks’ individual capital requirements, I find evidence that an increase to the minimum capital requirement of a firm’s primary bank is associated with 3 percent less borrowing, relative to firms not facing increased capital requirements to their primary bank. While firm borrowing is sensitive to capital requirements of their primary bank, I find, on average, no material effect on firm’s assets growth as firms are able to substitute towards equity financing instead of reducing their balance sheets. Investigating the heterogeneous effects, however, I find that young firms with negative earnings are particular sensitive to capital requirements of their primary bank and are led to reduce assets growth.
Keywords: Financial Regulation, Capital Requirements, Credit Supply
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation