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Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment

63 Pages Posted: 1 Dec 2016  

Reint Gropp

Halle Institute for Economic Research

Thomas C. Mosk

Goethe University Frankfurt - Research Center SAFE

Steven Ongena

University of Zurich - Department of Banking and Finance; KU Leuven; Centre for Economic Policy Research (CEPR)

Carlo Wix

Goethe University Frankfurt - Research Center SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2016

Abstract

We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.

Keywords: Bank capital ratios, Bank regulation, Credit supply

JEL Classification: E51, G21, G28

Suggested Citation

Gropp, Reint and Mosk, Thomas C. and Ongena, Steven and Wix, Carlo, Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment (November 30, 2016). SAFE Working Paper No. 156. Available at SSRN: https://ssrn.com/abstract=2877771 or http://dx.doi.org/10.2139/ssrn.2877771

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Thomas C. Mosk

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Carlo Wix (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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