Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment
86 Pages Posted: 1 Dec 2016 Last revised: 22 Jan 2018
Date Written: January 22, 2018
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
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