Work

The state-dependent impact of changes in bank capital requirements

Year: 2025

Type: article

Abstract: Based on a non-linear structural banking sector model, we show that the impact of changes in bank capital requirements on lending is strongly state-dependent. When banks make profits or maintain voluntary capital buffers, the impact on lending works through a “pricing channel” which is small: 0.1% less loans for a 1pp capital requirement increase. When banks are capital-constrained, the impact on lending works through a “quantity channel” which is large: 10% more loans for a 1pp capital requirement reduction. Our results provide a theoretical justification for building up a positive neutral countercyclical capital buffer in “normal” macro-financial environments.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2025.107439

Authors: Jan Hannes Lang, Dominik Menno

Institutions: European Central Bank, Deutsche Bundesbank

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,340

Funders: European Environment Agency, European Central Bank, Deutsche Bundesbank