The impact of bank regulation on the cost of credit: Evidence from a discontinuity in capital requirements |
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| Affiliation: | 1. Bank of Canada, Canada;2. Federal Reserve Bank of Kansas City, United States;3. Federal Reserve Bank of Boston, United States;1. University of South Carolina, Center for Financial Institutions at Darla Moore School of Business, Wharton Financial Institutions Center, European Banking Center, United States;2. University of South Carolina, Darla Moore School of Business, Stanford University, United States;3. Stanford University, United States;4. Federal Reserve Bank of Philadelphia, United States;1. New York University and NBER, New York, NY, USA;2. Brandeis University and CEPR, Waltham, MA, USA;3. Board of Governors of the Federal Reserve System, Washington, DC, USA;4. Bank for International Settlements and CEPR, Basel, Switzerland |
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| Abstract: | We study the effect on credit relationships of the Small and Medium Enterprises Supporting Factor (SME-SF), a regulatory risk weight reduction on small loans to SMEs. Employing a regression discontinuity design and matched bank-firm data from Italy, we find that a 1 percent drop in capital requirements causes an average 13 basis points reduction in the cost of credit. Moreover, with a novel measure of bank regulatory capital scarcity, we show that the drop is larger for banks facing tighter constraints. Furthermore, the drop is larger for firms with low switching costs, while the sharp assignment rule may have led to the rationing of marginal borrowers. Such findings indicate that the entire distribution of firms and banks’ characteristics plays a crucial role in determining the impact of regulatory capital changes. |
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| Keywords: | Capital requirements SME Cost of credit Credit access Switching costs |
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