Working Paper: CEPR ID: DP18404
Authors: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
Abstract: Using a narrative identification strategy, we trace the dynamic effects of higher US capital requirements to bank lending and the real economy. In the short run, banks deleverage and reduce lending, which in turn lowers real economic activity. However, these effects are temporary. Over the longer run, we document a permanent shift in the funding structure of banks towards more equity financing, less debt funding and a less risky portfolio allocation. Bank assets, lending and economic activity recover to their pre-regulation values within less than four years, while bank risk, risk perception and uncertainty decrease persistently.
Keywords: Bank Capital Requirements; Narrative Approach; Local Projections
JEL Codes: C32; E44; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher bank capital requirements (G28) | Reduced bank lending (G21) |
| Higher bank capital requirements (G28) | Decline in real economic activity (E32) |
| Reduced bank lending (G21) | Decline in real economic activity (E32) |
| Higher bank capital requirements (G28) | Increase in equity funding (G24) |
| Higher bank capital requirements (G28) | Rise in capital ratio (O16) |
| Higher bank capital requirements (G28) | Permanent reduction in bank defaults (G21) |
| Higher bank capital requirements (G28) | Decrease in realized bank stock volatility (G17) |
| Higher bank capital requirements (G28) | Decrease in risk perception (D81) |
| Negative credit supply conditions (E51) | Non-negligible short-run effects on real activity (E44) |