Risk-weighted capital requirements and portfolio rebalancing |
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| Institution: | 1. BI Norwegian Business School, Nydalsveien 37, 0484 Oslo, Norway;2. Brown University, 64 Waterman Street, Providence, RI 02906, USA;1. Stockholm University, 106 91 Stockholm, Sweden, and Research Institute of Industrial Economics, Box 55665, 112 15 Stockholm, Sweden;2. Saïd Business School, University of Oxford, Park End Street, Oxford OX1 1HP, UK;1. Lumsa University, Rome;2. Michigan State University, Department of Economics, Marshall-Adams Hall, 486 W Circle Dr. Rm 110, East Lansing, MI 48824, USA;3. Luiss University, Rome;1. Cass Business School, London, United Kingdom;2. CEPR, United Kingdom;3. Bank for International Settlements, Basel, Switzerland |
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| Abstract: | We use a 2013 Norwegian policy reform to study how banks react to higher capital requirements and how these adjustments transmit to the real economy. Using bank balance sheet data, we document that banks raise capital ratios by reducing risk-weighted assets. Most of the reduction in risk-weighted assets is accounted for by a reduction in average risk weights. Consistent with this reduction in risk, we document a substantial decline in credit supply to the corporate sector relative to the household sector. We also show that banks react to higher requirements by increasing interest rates, consistent with the reduction in corporate credit growth being supply driven. Using administrative loan level tax data, we document a reduction in lending on the firm level. This is robust to controlling for firm fixed effects, thereby accounting for potential firm-bank matching. Finally, we find that the reduction in bank lending has a negative impact on firm employment growth and that this effect is driven by small firms. |
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