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

Working Paper N° 303

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Abstract

We analyze how time-varying bank-specific capital requirements a ect 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.