No. 1372 - Higher capital requirements and credit supply: evidence from Italy

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by Maddalena Galardo and Valerio Paolo VaccaJune 2022

The paper investigates the short-term impact on credit supply of the higher risk-based capital requirements implemented in 2014 with Basel III reforms, using a granular dataset on bank loans to Italian firms matched to information on firms' and banks' characteristics. The study focuses on the relationship between banks' capital positions before the reform and their lending supply in the early years after the reform, while the steady-state impact of higher capital requirements is not addressed.

In the early years after the reform, higher requirements are associated with credit tightening, especially towards risky firms. The tightening is stronger for banks that, before the reform, had a capital buffer below the first quartile of its distribution but not for banks with extremely weak capital positions (below the first decile); the latter tightened credit to a lesser extent, since they benefitted the most from the forced safety effect due to Basel III.

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