The Real Effects of Bank Capital Requirements

M. Brun, H. Fraisse and David Thesmar

Debats Economiques et financiers from Banque de France

Abstract: We measure the impact of bank capital requirements on corporate borrowing and business activity. We use loan-level data and take advantage of the transition from Basel 1 to Basel 2. While under Basel 1 the capital charge was the same for all firms, under Basel 2, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the semi-elasticity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: a one percentage point increase in capital requirements leads to a reduction in lending by approximately 10%. At the firm level, borrowing is reduced, as well as total assets (mostly working capital); we provide some evidence of the impact on employment and investment. Overall, however, because Basel 2 reduced the capital requirements for the average firm, our results suggest that the transition to Basel 2 supported firm activity during the crisis period.

Keywords: Bank capital ratios; Bank regulation; Credit supply. (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Related works:
Working Paper: The Real Effects of Bank Capital Requirements (2013)
Working Paper: The Real Effects of Bank Capital Requirements (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:decfin:8

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