The impact of bank regulation on the cost of credit: Evidence from a discontinuity in capital requirements

Emilia Bonaccorsi di Patti, Mirko Moscatelli and Stefano Pietrosanti

Journal of Financial Intermediation, 2023, vol. 55, issue C

Abstract: We study the effect on credit relationships of the Small and Medium Enterprises Supporting Factor (SME-SF), a regulatory risk weight reduction on small loans to SMEs. Employing a regression discontinuity design and matched bank-firm data from Italy, we find that a 1 percent drop in capital requirements causes an average 13 basis points reduction in the cost of credit. Moreover, with a novel measure of bank regulatory capital scarcity, we show that the drop is larger for banks facing tighter constraints. Furthermore, the drop is larger for firms with low switching costs, while the sharp assignment rule may have led to the rationing of marginal borrowers. Such findings indicate that the entire distribution of firms and banks’ characteristics plays a crucial role in determining the impact of regulatory capital changes.

Keywords: Capital requirements; SME; Cost of credit; Credit access; Switching costs (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:55:y:2023:i:c:s1042957323000232

DOI: 10.1016/j.jfi.2023.101040

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