Does capital-based regulation affect bank pricing policy?

Abstract

This paper tests whether a series of changes to capital requirements transmitted to a change to banks’ pricing policy. We compile a rich bank-level supervisory dataset covering the banking sector in the Czech Republic over the period 2004–2019. We estimate that the changes to the overall capital requirements did not force banks to alter their pricing policy. The impact on bank interest margins and loan rates is found to lie in a narrow range around zero irrespective of loan category. Our estimates allow us to rule out effects even for less-capitalised banks and small banks. The results obtained contradict estimates from other studies reporting significant transmission of capital regulation to lending rates and interest margins. We therefore engage in a deeper discussion of why this might be the case. Our estimates may be used in the ongoing discussion of the benefits and costs of capital-based regulation in banking. Supplementary Information The online version contains supplementary material available at 10.1007/s11149-022-09448-5.

Impact of capital regulation on interest rate pass‐through in Sub‐Saharan Africa

“…For instance, Phi et al (2019) found no evidence that a more stringent capital regulation induces higher lending rates in the long run in the Vietnamese banking industry over the period 2008 to 2016. Similar results are reported by Ehrenbergerová, Hodula, and Gric (2022) who found that changes to the overall capital requirements in the Czech Republic did not force banks to alter their loan pricing. In contrast, Fischer et al (2012) found mixed results in their study on how margins on US‐syndicated loans changed when there was an adjustment in capital regulation: For the period 1988–1992 (a period when regulatory changes and market pressures forced banks to hold higher capital ratios), the authors found a negative relationship between capital ratio and loan rates.…”

“…Parameter β will also be less than one if banks have some degree of market power or if there are switching costs and/or asymmetric information costs (Bondt, 2005). The framework in Equation () can be augmented to also account for the pass‐through from capital‐based regulation in line with Ehrenbergerová, Hodula, and Gric (2022) by allowing for to have both, a constant ( and a time‐varying constant ( component. Equation () can thus be re‐written as …”