The Real Effects of Bank Capital Requirements

We exploit the intrinsic heterogeneity of the Basel II regulatory framework, which has been in place in France since 2008, and make capital requirements vary across both banks and across firms. This two-way variation allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find a large effect of capital requirements on bank lending: a one percentage increase in capital requirements leads to a reduction in lending by approximately 10%.