Bank Capital Requirements and Lending in Emerging Markets: The Role of Bank Characteristics and Economic Conditions

Abstract

This paper offers novel evidence on the impact of raising bank capital requirements on lending in an emerging market and explores heterogeneous effects, depending on bank characteristics and economic conditions. Using quarterly bank-level data and exploiting the adoption of bank-specific capital buffers, we find that higher capital requirements are associated with lower credit growth in Peru. But the effect is short-lived and becomes insignificant in about half a year. The impact of capital requirements varies with economic conditions and bank characteristics. The effects is stronger during periods of lower economic growth. Weaker (less profitable, less capitalized and less liquid) banks react more to changes in capital requirements. Our findings are robust to estimating a variety of specification to address concerns about the endogeneity of capital requirements.