Effect of Bank Capital Requirements on Economic Growth: A Survey

Why bank capital matters for monetary policy

“…Michelangeli and Sette (2016) use a novel micro dataset constructed from web-based mortgage brokers to show that better capitalised banks lend more. More generally, empirical evidence shows that in economic systems underpinned by relationship-based lending, adequate bank capital allows financial intermediaries to shield firms from the effects of exogenous shocks (Bolton et al 2016;Gobbi and Sette;2015). Figure 1 gives a preview of our main findings.…”

“…This explanation implies that equity reacts to cycle conditions. 2 For a more comprehensive review see Martynova, 2015. Boot, 2000, Thakor, 2005, Bolton et al, 2016 point to the importance of relationship lending, while the impact of capital on loan risk is examined by Flannery, 1989, Gennotte and Pyle, 1991, Blum and Hellwig, 1995, Hellman et al, 2000, Kim and Santomero, 1988Rochet, 1992, Repullo, 2004, De Jonghe, 2010, and Kashyap et al 2010 While the majority of studies link capital with lower risks, Barth et al, 2004 and Demirgüç-Kunt and Detragiache, 2011 find mixed evidence.…”

Climate Transition Risk, Climate Sentiments, and Financial Stability in a Stock-Flow Consistent Approach

“…Fratzscher et al (2016) analyse the impact of financial regulation and more independent supervision with respect to banks stability and credit provisioning using country panel data, concluding that tighter capital buffers had positive effects on banks stability. Considering the effects on lending, several studies (Ben Naceur et al, 2018;Aiyar et al, 2016;Martynova, 2015) find an inverse relationship between tighter capital regulation and growth in banks lending to the real economy.…”

“…The bank achieves the target CAR through interest rate adjustments (King, 2010;Martynova, 2015), which also incorporate sector-specific credit conditions. This feature represents a proxy for limiting bank's credit supply to the real economy.…”

Capital regulation and bank balance sheet adjustments: a simultaneous approach

“…These costs are then passed on to borrowers through higher lending rates (King, ) and, consequently, constrain loan demand (Slovik and Cournède, ). It is not clear whether the increased lending spread affects economic activity, but it may attract lower quality borrowers and increase financial instability (Martynova, ). If banks opt to shrink their asset size or reduce the number of high risk‐weighted assets such as loans, there may be negative effects on economic growth because of the restriction on the amount of investments to be funded.…”