Revisiting the Impact of Bank Capital Requirements on Lending and Real Activity

Abstract

Several studies undertaken in the aftermath of the 2007-2009 crises found a relatively small impact of an increase in capital requirements on lending and real activity both in the shortand long-run. The calibrations of some recent equilibrium models deliver a significantly larger impact of changes in capital requirements on lending and real activity than these earlier studies. This paper revisits the issue reviewing the recent literature and providing novel evidence using international data panels at a firm and country level. This new evidence and the counterfactual experiments of some calibrated equilibrium models suggest that the negative short-run and long-run impact of an increase in capital requirements on bank lending and real activity is significantly larger than previously thought. *The views expressed in this paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.