Capital Requirements and Bank Lending

Project Start:02/2014
Status:Completed
Researchers:
Category: Financial Intermediation, Transparency Lab
Funded by:LOEWE

The project investigates the effect of bank capital requirements on financial intermediation. The paper exploits the increase in the capital requirements of banks subject to the European Banking Authority (EBA) capital exercise. In October 2010, the EBA announced to raise the tier 1 capital requirements of the largest European banks from 6 percent to 9 percent. Firstly, the project examines whether the announcement of the EBA capital exercise affect the stock returns of the banks subject to the new capital requirements. Subsequently, a difference-in-difference estimation technique is used to study the effect of the increase in the capital requirements on bank leverage, asset growth and lending. As control group Swiss and US banks and European banks that are not subject to the EBA capital exercise are used.

The first results of the event study show that the first press announcement of the 9 percent tier 1 capital requirements of the capital exercise is associated with negative cumulative abnormal returns of banks which participated in the EBA, in particular banks with an ex ante/ ex post capital shortfall. These results show that the increase of capital requirements has an effect on the bank stock prices and forms the motivation for the second part of the empirical analysis that concentrates on how these banks adjust their capital ratios to explain the negative announcement effects. The paper studies the effect of higher capital requirements on banks’ balance sheet adjustments and the transmission of this effect to the real economy. The paper uses the 2011 EBA capital exercise, which significantly raised the capital requirements for a subset of European banks, as a natural experiment. The paper exploits exogenous variation in the EBA bank selection rule and uses a difference-in-difference matching estimator approach to identify the effect of higher capital requirements.

 

Related Published Papers

Author/sTitleYearProgram AreaKeywords
Reint Gropp, Thomas Mosk, Steven Ongena, Carlo WixBank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment
Review of Financial Studies
2019 Financial Intermediation, Transparency Lab Bank capital ratios, Bank regulation, Credit supply

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
156Reint Gropp, Thomas Mosk, Steven Ongena, Carlo WixBank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment2016 Financial Intermediation, Transparency Lab Bank capital ratios, Bank regulation, Credit supply
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