Bank capital (requirements) and credit supply: Evidence from pillar 2 decisions

Abstract

We analyze how time-varying bank-specific capital requirements affect banks' balance sheet adjustments as well as bank lending to the non-financial corporate sector. To do so, we relate Pillar 2 capital requirements to bank balance sheet data, a fully documented corporate credit register and firm balance sheet data. Our analysis consists of three components. First, we examine how time-varying bank-specific capital requirements affect banks' balance sheet composition. Subsequently, we investigate how capital requirements affect the supply of bank credit to the corporate sector, both on the intensive and extensive margin, as well as for different types of credit. Finally, we document how bank characteristics, firm characteristics and the stance of monetary policy impact the relationship between bank capital requirements and credit supply.

Time‐Varying Capital Requirements and Disclosure Rules: Effects on Capitalization and Lending Decisions

“…De Jonghe et al. () investigate time‐varying bank specific capital requirements in Belgium and observe a reshuffling of banks’ loan portfolios driven by smaller, riskier, or less profitable banks affecting mostly large, risky and low borrowing cost firms. Fraisse et al.…”

Are bank capital requirements optimally set? Evidence from researchers’ views

“…20 The large strand of the literature that has investigated potential effects of higher capital requirements on loan supply include e.g. Hancock and Wilcox, 1998;Conti et al, 2018;De Jonghe et al, 2019;Deli and Hasan, 2017;Eickmeier et al, 2018;Fraisse et al, 2017;Glancy and Kurtzman, 2018;Imbierowicz et al, 2018;Kanngiesser et al, 2019;Meeks, 2017;Uluc and Wieladek, 2018;Tolo and Miettinen, 2018. At least a short-term negative effect on loan supply of higher capital requirements may be due to their positive effect on bank funding costs (Schmidt, 2019).…”

“…At least a short-term negative effect on loan supply of higher capital requirements may be due to their positive effect on bank funding costs (Schmidt, 2019). 21 An important subset of the literature has also explored unintended consequences of bank capital regulation as well as interactions with other forms of banking regulation, particularly liquidity requirements (Boissay and Collard, 2016;Faia, 2019;De Nicolo et al, 2014) and monetary policy (Gambacorta and Murcia, 2019;De Jonghe et al, 2019;Eickmeier et al, 2018;Meeks, 2017;Takats and Temesvary, 2019;Uluc and Wieladek, 2018). Other considerations are effects on banking competition (Corbae and D'Erasmo, 2019), liquidity in repo and other financial markets (Van Horen and Kotidis, 2018;Boissay et al, 2018;Haselmann et al, 2019;Cenedese et al, 2019), cross-border spillovers (Franch et al, 2019;Takats and Temesvary, 2019), risk-taking (Martynova et al, 2019) and portfolio rebalancing away from risky (but potentially productive) lending towards safer assets (bonds or household mortgages) (Cohen and Scatigna, 2016;Ambrocio and Jokivuolle, 2017;Juelsrud and Wold, 2018;Gropp et al, 2019;Mayordomo and Rodriguez-Moreno, 2018), the non-price terms of credit contracts (Mayordomo et al, 2019), and shift in intermediation towards shadow banks (Irani et al, 2018).…”

Discretionary Capital Buffers and Bank Risk

“…[ (Barth et al, 2005, Chapter 5). (Jensen, 2015, Gropp et al, 2016, De Marco and Wieladek, 2016, De Jonghe et al, 2019.…”