Bank Capital Requirements and Bank Lending: From Theory to Empirics to Policy

Saleem Bahaj, Chiara Lattanzio and Malherbe, Frédéric

No 19942, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Macroprudential regulation is often viewed as a trade-off between banking system stability and aggregate credit supply. In this paper, we provide a comprehensive analysis of how changes in capital requirements affect bank lending. We use a theoretical framework to assess and nuance the trade-off. We show that imperfect competition, general equilibrium effects, and asset heterogeneity among banks result in lending responses that are complex and difficult to estimate. Armed with these theoretical insights, we assess existing strategies in the empirical literature and provide guidance for future research.

Date: 2025-02
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