Effect of Bank Capital Requirements on Economic Growth: A Survey

25 Pages Posted: 13 Mar 2015

See all articles by Natalya Martynova

Natalya Martynova

De Nederlandsche Bank - Research Department

Date Written: March 12, 2015

Abstract

This paper reviews studies exploring how higher bank capital requirements affect economic growth. There is little evidence of a direct effect; research focuses on the indirect effects of capital requirements on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth. Banks facing higher capital requirements can reduce credit supply as well as decrease credit demand by raising lending rates which may slow down economic growth. However, having better-capitalized banks enhances financial stability by reducing bank risk-taking incentives and increasing banks’ buffers against losses.

Keywords: bank capital requirement, credit growth, financial stability, economic growth, cost of equity

JEL Classification: G21, G28

Suggested Citation

Martynova, Natalya, Effect of Bank Capital Requirements on Economic Growth: A Survey (March 12, 2015). De Nederlandsche Bank Working Paper No. 467, Available at SSRN: https://ssrn.com/abstract=2577701 or http://dx.doi.org/10.2139/ssrn.2577701

Natalya Martynova (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

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