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The Real Effects of Bank Capital Requirements

Henri Fraisse (), Mathias Lé () and David Thesmar ()
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Henri Fraisse: Autorité de Contrôle Prudentiel et de Résolution, Banque de France, 75009 Paris, France;
David Thesmar: MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142; Center for Economic and Policy Research, Washington, District of Columbia 20009

Management Science, 2020, vol. 66, issue 1, 5-23

Abstract: We measure the impact of bank capital requirements on corporate borrowing, investment, and employment using loan-level data. The Basel II regulatory framework makes capital requirements vary across both banks and firms, which allows us to control for time-varying firm-level risk and bank-level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 2.3%–4.5%. Firms can attenuate this reduction by substituting borrowing across banks, but only to a limited extent. The resulting reduction in borrowing capacity affects significantly both investment and employment: for firms whose effective capital requirements increase by 1 percentage point, fixed assets are reduced by 1.1%, capital expenditures by 2.7%, and employment by 0.8%.

Keywords: bank capital ratios; bank regulation; credit supply (search for similar items in EconPapers)
Date: 2020
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Working Paper: The real effects of bank capital requirements (2017) Downloads
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