The Costs and Benefits of Bank Capital Requirements
15 Pages Posted: 3 Mar 2018
Date Written: March 3, 2018
This paper presents empirical evidence on the impact of changes in capital requirements on bank lending, and delivers estimates of their costs and benefits in terms of foregone real GDP growth. The empirical analysis is based on large international datasets at a firm and country level, including data of the 2007-2009 crisis and beyond. I find that an increase in regulatory capital ratios reduces real GDP growth, with this reduction offsetting its benefits in terms of a reduced probability of a banking crisis. This evidence suggests that the net benefits of an increase in capital requirements may be negligible.
Keywords: Bank Capital, Bank Lending, Real Activity, Costs, Benefits
JEL Classification: G21, C23
Suggested Citation: Suggested Citation