Do Banking Regulations Affect Lending? The Case of the EU.

Abstract

While many studies analysed the impact of capital regulations on lending, not much attention has been devoted to the role of other regulatory aspects in shaping credit expansion. The present study endeavours to fill this void by analysing the relation between a broad array of banking regulations and lending over two periods: 2005-2014 and the crisis period 2007-2010. The study covers 886 commercial banks from 27 EU countries. A further contribution of the study is an intertemporal approach to regulations. This method is applied to account for the fact that the substantial pre-crisis changes of the regulatory frameworks in the EU countries may have created an external shock to the banking system which affected lending. Also, the study endeavours to capture the effect of regulations on the quality of loans by analysing the dynamics of nonperforming loans (NPL). Finally, the paper aims at assessing the post crisis regulatory changes in the EU in terms of their potential effect on bank lending. The results indicate that several aspects of banking regulation impacted the level and quality of bank lending significantly, as well during the whole sample period, as during the crisis. The results have implications for the ongoing banking regulatory reform in the EU.