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Contribution Details

Type Master Thesis
Scope Discipline-based scholarship
Title How does capital requirement affect bank lending behavior?
Organization Unit
  • Li Zhang
  • Jean-Charles Rochet
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Date September 2015
Abstract Text This thesis studies the impact of capital requirement on bank lending behavior. Banks with high leverage tend to take excessive risk, and government guarantees induce banks to over lever and take on more risks. Capital regulation is considered an attractive instrument to mitigate banks’ risk-shifting incentives. The broadly used regulatory policy is the capital requirement introduced by the Basel Committee. Over time, the requirement is kept revised, and increased to a higher level after the recent financial crisis. However, higher capital requirement may adversely affect bank lending, and impede the economic growth. Analyzing how does capital requirement affect bank lending behavior can bring about some implications for the further policy design. Two academic papers are presented to analyze the impact of capital requirement on bank lending behaviors. Even though the two papers provide a consistent view that higher capital requirement reduces the bank loan supply, there is still a lack of consensus on how best to design capital requirement standards.
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