The state-dependent impact of changes in bank capital requirements

Jan Hannes Lang and Dominik Menno

Journal of Banking & Finance, 2025, vol. 176, issue C

Abstract: Based on a non-linear structural banking sector model, we show that the impact of changes in bank capital requirements on lending is strongly state-dependent. When banks make profits or maintain voluntary capital buffers, the impact on lending works through a “pricing channel” which is small: 0.1% less loans for a 1pp capital requirement increase. When banks are capital-constrained, the impact on lending works through a “quantity channel” which is large: 10% more loans for a 1pp capital requirement reduction. Our results provide a theoretical justification for building up a positive neutral countercyclical capital buffer in “normal” macro-financial environments.

Keywords: Bank capital requirements; Loan supply; Dynamic stochastic equilibrium model; Financial accelerator; Global solution methods (search for similar items in EconPapers)
JEL-codes: D21 E44 E51 G21 G28 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:176:y:2025:i:c:s0378426625000597

DOI: 10.1016/j.jbankfin.2025.107439

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