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

Abstract

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

Jensen, Thais, The Real Effects of Higher Capital Requirements: Evidence from Danish Firm-Level Data (June 30, 2015). Available at SSRN: https://ssrn.com/abstract=2315551 or http://dx.doi.org/10.2139/ssrn.2315551

Thais Jensen (Contact Author)

Independent ( email )

No Address Available

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