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The Impact of Capital Requirements on Bank Lending Behavior

Greve, Christoffer Jansønn; Beltestad, Jørgen
Master thesis
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https://hdl.handle.net/11250/2687468
Date
2020
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  • Master of Science [963]
Abstract
In this paper, we investigate if stricter capital requirements have a significant impact on bank lending

to European households and corporations. The Basel III accords tightened Tier 1 capital and Common

Equity Tier 1 (CET1) capital requirements. These requirements must be at least 4.5% and 6%

respectively, of risk-weighted assets. We study if Tier 1 capital affect corporate lending and

household lending. We have built a data set on European Central Bank (ECB) bank data, which we

use to run regressions on lending to households and corporations in Europe. Tier 1 capital ratio and

Common Equity Tier 1 ratio both increase household lending when capital requirements tighten.

However, when estimating the effect of the two capital requirements on the ratio of growth in loans

to households relative to growth in loans to corporations, the results have the opposite effect. Stricter

Tier 1 capital requirements suggest that banks substitute towards corporate lending. On the opposite

side, an increase in Common Equity Tier 1 suggest that banks substitute towards household lending.
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Masteroppgave(MSc) in Master of Science in Finance - Handelshøyskolen BI, 2020
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Handelshøyskolen BI

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