DP12172 Changes in the Cost of Bank Equity and the Supply of Bank Credit
|Author(s):||Claire Célérier, Thomas Kick, Steven Ongena|
|Publication Date:||July 2017|
|Keyword(s):||bank capital, credit, regulation|
|JEL(s):||E51, E58, G21, G28|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12172|
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.