1. The Real Effects of Bank Capital Requirements
- Author
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David Thesmar, Mathias Lé, Henri Fraisse, Haldemann, Antoine, Les Afriques dans le monde (LAM), Institut de Recherche pour le Développement (IRD)-Université Bordeaux Montaigne-Institut d'Études Politiques [IEP] - Bordeaux-Sciences Po Bordeaux - Institut d'études politiques de Bordeaux (IEP Bordeaux)-Centre National de la Recherche Scientifique (CNRS), Groupement de Recherche et d'Etudes en Gestion à HEC (GREGH), Ecole des Hautes Etudes Commerciales (HEC Paris)-Centre National de la Recherche Scientifique (CNRS), and HEC Paris Research Paper Series
- Subjects
G28 ,Bank capital ,Strategy and Management ,Bank capital ratios ,Bank regulation ,Credit supply ,Financial system ,Basel II ,Management Science and Operations Research ,jel:G21 ,jel:G28 ,JEL: G - Financial Economics/G.G2 - Financial Institutions and Services/G.G2.G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages ,0502 economics and business ,ddc:330 ,Capital requirement ,JEL: G - Financial Economics/G.G2 - Financial Institutions and Services/G.G2.G28 - Government Policy and Regulation ,050207 economics ,E51 ,health care economics and organizations ,Measure (data warehouse) ,050208 finance ,jel:E51 ,05 social sciences ,1. No poverty ,JEL: E - Macroeconomics and Monetary Economics/E.E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit/E.E5.E51 - Money Supply • Credit • Money Multipliers ,Bank capital ratios, Bank regulation, Credit supply ,Investment (macroeconomics) ,8. Economic growth ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,G21 ,Business ,[SHS.GESTION] Humanities and Social Sciences/Business administration - 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.
- Published
- 2020