Two-way interplays between capital buffers and credit growth: Evidence from French banks

We assess the extent to which bank capital buffers exacerbate the cyclical behavior of credit. We empirically study the relationships between GDP growth, capital buffers and loan growth with firm-level data for French banks over the period 1993–2009. Based on panel data simultaneous equations and Granger causality tests, our findings point to mutually reinforcing mechanisms between capital buffers and loan growth, all the more as better quality capital is considered. Overall, those empirical results lend support to a countercyclical financial regulation focused on high-quality capital and loan growth smoothing.