No. 1199 - Bank capital constraints, credit supply and economic activity

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by Antonio Maria Conti, Andrea Nobili and Federico Maria Signoretti November 2018

This paper evaluates the short-term effects of an increase in bank capital (defined as the ratio between common equity and risk-weighted assets).

The analysis, which is based on different episodes of changes in the degree of capitalization in Italy in the last ten years, makes it possible to disentangle the increases induced by regulatory or supervisory interventions from those associated with macroeconomic and financial dynamics/trends.

The adjustment of the degree of bank capitalization, which is essential for financial stability in the long term, may imply some short-term costs for the economy, which are especially significant in periods of low growth.

More recently, bank capital increases seem to have contributed to holding back both the pickup of credit to non-financial corporations and households and the recovery in economic activity.

The results are in line with studies for other countries.

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