Do regulations and supervision shape the capital crunch effect of large banks in the EU?

Małgorzata Olszak, Mateusz Pipień, Iwona Kowalska () and Sylwia Roszkowska ()
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Iwona Kowalska: Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland
Sylwia Roszkowska: University of Warsaw, Faculty of Management

No 32015, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: This paper extends the literature on the capital crunch effect by examining the role of public policy for the link between lending and capital in a sample of large banks operating in the European Union. Applying Blundell and Bond (1998) two-step robust GMM estimator we show that restrictions on bank activities and more stringent capital standards weaken the capital crunch effect, consistent with reduced risk taking and boosted bank charter values. Official supervision also reduces the impact of capital ratio on lending in downturns. Private oversight seems to be related to thin capital buffers in expansions, and therefore the capital crunch effect is enhanced in countries with increased market discipline. We thus provide evidence that neither regulations nor supervision at the microprudential level is neutral from a financial stability perspective. Weak regulations and supervision seem to increase the pro-cyclical effect of capital on bank lending.

Keywords: capital ratio; lending; capital crunch; regulations; supervision; procyclicality (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec and nep-mac
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