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

86 Pages Posted: 1 Dec 2016 Last revised: 22 Jan 2018

See all articles by Reint Gropp

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; Swiss Finance Institute; 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: January 22, 2018

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 is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets and - consistent with debt overhang - not by raising their levels of equity. Banks reduce lending to corporate and retail customers, resulting in lower asset-, investment- and sales growth for firms obtaining 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 R. G. and Wix, Carlo, Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment (January 22, 2018). 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

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Carlo Wix (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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