Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity

65 Pages Posted: 23 Jul 2020

See all articles by Deniz Igan

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Ali Mirzaei

American University of Sharjah

Date Written: June 1, 2020

Abstract

Whether and to what extent tougher bank regulation weighs on economic growth is an open empirical question. Using data from 28 manufacturing industries in 50 countries, we explore the extent to which cross-country differences in bank liquidity and capital levels were related to differences in sectoral activity around the period of the global financial crisis. We find that industries which are more dependent on external finance, in countries where banks had higher liquidity and capital ratios, performed relatively better during the crisis, with regard to investment rates and the creation of new enterprises. This relationship, however, exists only for bank-based systems and emerging market economies. In the pre-crisis period, we find only a marginal link to bank capital. These findings survive a battery of robustness checks and provide some solid support for the tighter prudential measures introduced under Basel III.

JEL Classification: G01, G28, L6, E01, G21, E52, K2, E63

Suggested Citation

Igan, Deniz and Mirzaei, Ali, Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3652491 or http://dx.doi.org/10.2139/ssrn.3652491

Deniz Igan (Contact Author)

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ali Mirzaei

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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