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Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment

Review of Financial Studies, Vol. 32, Issue 1, pp. 266–299

Authors:
Reint Gropp,
Thomas Mosk,
Steven Ongena,
Carlo Wix
Research Area:
Financial Intermediation
Date:
Jan 2019
Keywords:
Bank capital ratios, Bank regulation, Credit supply
Abstract:

We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets and - consistent with debt overhang - not by raising their levels of equity. Banks reduce lending to corporate and retail customers, resulting in lower asset-, investment- and sales growth for firms obtaining a larger share of their bank credit from the treated banks.

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