The Capital Requirements Regulation (CRR) considerably strengthens the quantity and quality of the minimum capital that banks in Europe are required to hold. The present study assesses whether increased minimum capital requirements, through observed changes in banks’ regulatory capital ratios, impact bank lending using data on a broad sample of banks in Europe, including for the period since the entry into force of the CRR on 1 January 2014.
In the short run authors find that an increase in the Total Capital Ratio leads to a statistically significant reduction in bank lending flows, and the estimated effect is robust to a wide range of robustness tests.
In the long run, simulation results based on a calibrated model indicate a negative relationship between bank lending stocks and regulatory capital ratios. However, contrary to the simulation results, our key finding, derived empirically using panel cointegration models, is that the impact of the Total Capital Ratio on bank lending stocks is not statistically different from zero.
Finally, th economists find no clear evidence of a relationship between increases in the Total Capital Ratio and bank financing of infrastructure through project finance across the models tested. This finding is corroborated by the results of a consultation and survey of banks providing infrastructure finance.
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