Empirical analysis reveals reduced lending and corporate downsizing following higher bank capital requirements, indicating substantial real economic costs of regulatory constraints.
We measure the impact of bank capital requirements on corporate borrowing, investment, and employment using loan-level data. The Basel II regulatory framework makes capital requirements vary across both banks and firms, which allows us to control for time-varying firm-level risk and bank-level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 2.3%–4.5%. Firms can attenuate this reduction by substituting borrowing across banks, but only to a limited extent. The resulting reduction in borrowing capacity affects significantly both investment and employment: for firms whose effective capital requirements increase by 1 percentage point, fixed assets are reduced by 1.1%, capital expenditures by 2.7%, and employment by 0.8%. This paper was accepted by Tomasz Piskorski, finance.
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Fraisse et al. (2019) studied this question.
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