The Real Effects of Bank Capital Requirements

Matthieu Brun (), Henri Fraisse () and David Thesmar

No 988, HEC Research Papers Series from HEC Paris

Abstract: We measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loan-level data and take advantage of the transition from Basel I to Basel II. While under Basel I the capital charge was the same for all firms, under Basel II, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: A 1 percentage point decrease in capital requirement leads to an increase in loan size by about 5%. At the firm level, borrowing also responds strongly although a bit less, consistent with some limited between-bank substitutability. Investment and employment also increase strongly. Overall, because the transition to Basel II led to an average reduction by 2 percentage points of capital requirements, we estimate that the new regulation led, in France, to an increase in average loan size by 10%, an increase in aggregate corporate lending by 1.5%, an increase in aggregate investment by 0.5%, and the creation or preservation of 235,000 jobs.

Keywords: Bank capital ratios; Bank regulation; Credit supply (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-07-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec, nep-mac and nep-rmg
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Citations: View citations in EconPapers (37)

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Related works:
Working Paper: The Real Effects of Bank Capital Requirements (2013)
Working Paper: The Real Effects of Bank Capital Requirements (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0988

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