Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment

51 Pages Posted: 4 May 2016

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

Date Written: 2016-04

Abstract

We exploit the cross-state, cross-time variation in bank tangible capital ratios-brought about by bank branch deregulation on a state-by-state basis-to identify the effects of bank capital pressures on employment and firm dynamics during two waves of changes in bank capital regulation. We show that stronger capital pressures temporarily slowed down growth in employment in industries that depend on external finance, retarding growth in the average size of firms rather than in the number of firms. Such effects were particularly strong for smaller firms that may not have had access to national capital and bank loan markets. Our findings indicate that a tightening of capital requirements may have significant real effects, in part because of the lack of substitutes for bank loans.

Keywords: Bank capital ratios, bank capital regulation, loan substitutability, employment, firm dynamics

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

Suggested Citation

Lee, Seung Jung and Stebunovs, Viktors, Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment (2016-04). FRB International Finance Discussion Paper No. 1161, Available at SSRN: https://ssrn.com/abstract=2774642 or http://dx.doi.org/10.17016/IFDP.2016.1161

Seung Jung Lee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Viktors Stebunovs

Board of Governors of the Federal Reserve System ( email )

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

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