Do Microprudential Regulations and Supervision Affect the Link Between Lending and Capital Ratio in Economic Downturns of Large Banks in the EU?

Małgorzata Olszak, Sylwia Roszkowska () and Marcell Zoltán Végh ()
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Sylwia Roszkowska: University of £odz, Faculty of Economic and Social Sciences; National Bank of Poland
Marcell Zoltán Végh: University of Warsaw, Faculty of Management, Department of Operational Research

Problemy Zarzadzania, 2017, vol. 15, issue 66, 11-36

Abstract: This paper extends the literature on the capital crunch effect by examining the role of public policy for the link between lending and capital in a sample of large banks operating in the European Union during economic downturns. Applying Blundell and Bond (1998) two-step robust GMM estimator, we show that restrictions on bank activities and more stringent capital standards weaken the capital crunch effect, consistent with reduced risk-taking and boosted bank charter values. Official supervision also reduces the impact of capital ratio on lending in downturns; however, its effect is only marginally significant in the sample of unconsolidated banks. Private oversight seems to be related to thin capital buffers in expansions, and therefore the capital crunch effect is enhanced in countries with increased market discipline. We thus provide evidence that neither regulations nor supervision at the microprudential level is neutral from a financial stability perspective. Weak regulations and supervision seem to increase the pro-cyclical effect of capital on bank lending.

Keywords: loan supply; bank capital; bank regulations (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G32 (search for similar items in EconPapers)
Date: 2017
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