The macroeconomic effects of bank capital requirement tightenings: Evidence from a narrative approach

Vol: 
42/2018
Author name: 
Eickmeier S
Kolb B
Prieto E
Year: 
2018
Month: 
September
Abstract: 

Bank capital regulations are intended to enhance financial stability in the long run, but may, in the meanwhile, involve costs for the real economy. To examine these costs we propose a narrative index of aggregate tightenings in regulatory US bank capital requirements from 1979 to 2008. Anticipation effects are explicitly taken into account and found to matter. In response to a tightening in capital requirements, banks temporarily reduce business and real estate lending, which temporarily lowers investment, consumption, housing activity and production. A decline in financial and macroeconomic risk helps sustain spending in the medium run. Monetary policy also cushions negative effects of capital requirement tightenings on the economy.

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