We investigate how banks' capital and lending decisions respond to changes in bank-specific capital and disclosure requirements. We find that an increase in the bank-specific regulatory capital requirement results in a higher bank capital ratio, brought about via less asset risk. A decrease in the requirement implies more lending to firms but also less Tier 1 capital and higher bank leverage. We do not observe differences between confidential and public disclosure of capital requirements. Our results empirically illustrate a tradeoff between bank resilience and a fostering of the economy through more bank lending using banks' capital requirement as policy instrument.JEL codes: G21, G28

Non-technical summary Research QuestionAiming at reducing the likelihood and severity of future financial crises, supervisory authorities around the world have been equipped with new tools to address risks in the banking system. The new regulatory regime -Basel III -introduces countercyclical capital requirements and enhanced disclosure requirements. The former mandate higher levels of capital during periods of strong credit growth that banks can then rely upon when the tides turn. Furthermore, disclosure requirements aim at providing market participants with a clearer picture of risk taking in banks such that they are able to discipline banks when risks build up. We investigate how banks' capital and lending decisions respond to changes in bank-specific capital and disclosure requirements. ContributionRelatively little systematic evidence exists about the effects of time-varying capital requirements and disclosure rules on bank behavior because these existed in only a few countries prior to Basel III. In this paper, we use the unique implementation of the Basel II framework since 2007 in Denmark as our setting to identify both the effects from time-varying capital requirements as well as disclosure rules.We analyze the effects on banks' lending, capital accumulation, and asset risk decisions resulting from changes in bank-specific time-varying capital requirements. A policy change that tightened disclosure rules by mandating banks to publish their individual capital requirement allows us to additionally study how different disclosure rules influence banks' reactions to changes in capital requirements. ResultsFollowing an increase in capital requirements, banks increase their capital ratio. This is achieved by a reshuffling of loans towards those with lower risk weights. The total loan volume and equity capital remain unaffected by the increase in requirements. However, banks reduce the buffer between the actual and regulatory capital ratios. For a decrease in the regulatory capital requirement, we find that banks increase their lending to firms. We additionally observe higher bank leverage due to a lower amount of Tier 1 capital as well as an increase in the buffer between the actual and regulatory capital ratios. Finally, we observe that the effects are strongest in an environment where the supervisor acts "hard" by closing banks when these breach their requirement. This suggests that the counter-cyclical capital buffer in Basel III might be less effective than currently intended because it is only a "soft" requirement for banks which does not result in a withdrawal of the banking license if it is violated. Nichttechnische Zusammenfassung FragestellungIn den letzten Jahren wurden Aufsichtsbehörden weltweit mit neuen Möglichkeiten ausgestattet, die We investigate how banks' capital and lending decisions respond to changes in bankspecific capital and disclosure requirements. We find that an increase in the bankspecific regulatory capital requirement results in a higher bank capital ratio, brought about via less ...

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