Working Paper: CEPR ID: DP18443
Authors: Hans Degryse; Mike Mariathasan; Carola Theunisz
Abstract: This paper investigates the intra-group transmission of stricter capital regulation imposed at the banking group level. Specifically, we study how a policy-induced increase in the regulatory capital ratio impacts the capital adequacy composition, lending and risk-taking of the affiliated subsidiaries. Using a combination of bank and loan-level data, we find that once a banking group faces tighterconsolidated capital requirements, the recapitalization efforts are concentrated at the subsidiary- as opposed to the headquarters-level. Subsidiaries reduce risk-weighted assets in part through a reduction in credit supply. This contraction is more pronounced at subsidiaries that are either relatively small, less profitable orloosely regulated.
Keywords: capital requirements; credit supply; international shock transmission
JEL Codes: E51; E58; F36; F42; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stricter capital requirements (G28) | Reduction in risk-weighted assets (RWAs) (G32) |
| Reduction in risk-weighted assets (RWAs) (G32) | Contraction in credit supply from subsidiaries (E51) |
| Stricter capital requirements (G28) | Diminished lending to existing borrowers (G21) |
| Stricter capital requirements (G28) | Contraction in credit supply from subsidiaries (E51) |