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Title: Changes in the Cost of Bank Equity and the Supply of Bank Credit

Author(s): Claire C�l�rier, Thomas Kick and Steven Ongena

Publication Date: July 2017

Keyword(s): bank capital, credit and regulation

Programme Area(s): Financial Economics

Abstract: Does the relative cost of equity determine the composition of bank balance sheets and credit supply? To answer this question, we exploit the staggered introduction of tax reforms in Europe from 2000 to 2012 as exogenous sources of changes in the cost of equity. We investigate the effect on credit supply using loan-level data in a country where firms are not affected by these reforms, and where foreign banks affected by the reforms are lending actively: Germany. We find that the relative decrease in the cost of equity leads banks to rely more on equity financing and to increase lending to firms while decreasing security and interbank asset holdings. Overall, we show that taxation can be an effective tool to contain bank leverage while maintaining credit supply.

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Bibliographic Reference

C�l�rier, C, Kick, T and Ongena, S. 2017. 'Changes in the Cost of Bank Equity and the Supply of Bank Credit'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12172