Working Paper Series no. 481: Credit Growth and Bank Capital Requirements: Binding or Not?

Abstract

This paper examines the sensitivity of non-financial corporate lending to banks' capital ratio  and their supervisory capital requirements. We use  a unique database for the French  banking sector between 2003 and 2011 combining confidential bank-level Bank Lending Survey answers with the discretionary capital requirements set by the supervisory authority. We find that on average, more capital means an acceleration of credit. But the elasticity of lending to capital depends on the intensity of the supervisory capital constraint. More supervisory capital-constrained banks tend to have a credit growth that is less sensitive to the capital ratio. Our results also show a similar effect for non-performing loans. When banks are constrained, credit growth is all the more sensitive to this type of assets as their share rises. However, both aforementioned effects weaken close to the supervisory minimum capital requirement.

Claire Labonne and Gildas Lamé
March 2014

Classification JEL : G21, G28, G32

Keywords : Lending, Bank Regulation, Capital