N° 8 : 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%. At the firm level, borrowing is reduced but to a lesser extent due to substitution effects (+5%). Firms borrow less from high capital requirement banks and more from low capital requirement ones. They also reduce lending to their clients, which offsets a large share of the impact of capital requirements on borrowing.

Overall, capital requirements then have a real impact on corporate investment, although this impact is somewhat dampened by firms decisions.