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

82 Pages Posted: 30 Nov 2016 Last revised: 22 Mar 2018

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Thomas C. Mosk

University of Zurich, Research Center SAFE

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Carlo Wix

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 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 requirements, bank lending, real economy

JEL Classification: E51, E58, 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 (March 8, 2018). Swiss Finance Institute Research Paper No. 16-70, Available at SSRN: https://ssrn.com/abstract=2877839 or http://dx.doi.org/10.2139/ssrn.2877839

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

University of Zurich, Research Center SAFE ( email )

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

Steven R. G. Ongena (Contact Author)

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

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Carlo Wix

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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