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Review of Financial Studies Vol. 32 No. 1 2019

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

Reint Gropp1; Thomas Mosk2; Steven Ongena3; Carlo Wix3

1 Halle Institute for Economic Research and University of Magdeburg · 2 Goethe University Frankfurt and SAFE · 3 University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR

open access

Abstract

We study the impact of higher capital requirements on banks’ balance sheets and their 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, not by raising their levels of equity, consistent with debt overhang. 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. Received November 28, 2016; editorial decision March 9, 2018 by Editor Philip Strahan.

DOI
10.1093/rfs/hhy052
Volume
32
Issue
1
Pages
266-299
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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