Bank capital requirements and risk-taking: Evidence from basel III

Rebeca Anguren, Gabriel Jiménez and Jose-Luis Peydro

Journal of Financial Stability, 2024, vol. 74, issue C

Abstract: We study the effects of both tighter and looser bank capital requirements on bank risk-taking. We exploit credit register data matched with firm and bank level data in conjunction with changes in capital requirements stemming from Basel III, including the introduction of a SME supporting bank capital factor in the European Union. We find that tighter capital requirements reduce the supply of bank credit to firms, while looser capital requirements mitigate the credit supply effects of increasing capital. Importantly, at the loan level (credit supply), banks more affected by capital requirements change less the supply of credit to riskier than to safer firms, and these asymmetric effects occur for both the tightening and the loosening of bank capital requirements. Finally, these effects are also important at the firm-level for total credit availability and for firm survival. Interestingly, our results suggest that those banks most impacted by the tighter Basel III capital requirements prioritize credit among ex-ante riskier firms to avoid their closure, consistent with loan evergreening.

Keywords: Bank capital requirements; Credit supply; Bank risk-taking; Basel III; Loan evergreening (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:74:y:2024:i:c:s1572308924000779

DOI: 10.1016/j.jfs.2024.101292

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