Bank response to policy-related changes in capital requirements

Vasja Sivec () and Matjaž Volk

The Quarterly Review of Economics and Finance, 2021, vol. 80, issue C, 868-877

Abstract: We estimate how banks respond to regulatory capital requirements. We use a novel measure called capital surplus/shortfall, which we construct from notifications on regulatory capital requirements sent to Slovenian banks over the period 2009–2015. Capital surplus/shortfall is more relevant than capital adequacy ratio (CAR). It conveys more information about future lending because it is a forward-looking measure of bank capitalization. Our paper carries policy implications for supervisors in countries with a distressed banking sector. Using this measure we show that the same firm has on average a 3.54 p.p. lower loan growth when the loan is obtained through a bank with 1 p.p. higher capital shortfall. Finally, we show that in response to an increase in capital requirements banks engage in risk-taking behaviour.

Keywords: Capital requirement; Credit; Regulation; Risk-taking; Policy (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Working Paper: Bank Response to Policy Related Changes in Capital Requirements (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:80:y:2021:i:c:p:868-877

DOI: 10.1016/j.qref.2019.04.013

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