DP18404 The macroeconomic effects of bank capital regulation
Using a narrative identification strategy, we trace the dynamic effects of higher US capital requirements to bank lending and the real economy. In the short run, banks deleverage and reduce lending, which in turn lowers real economic activity. However, these effects are temporary. Over the longer run, we document a permanent shift in the funding structure of banks towards more equity financing, less debt funding and a less risky portfolio allocation. Bank assets, lending and economic activity recover to their pre-regulation values within less than four years, while bank risk, risk perception and uncertainty decrease persistently.