Host(s): Khushboo Surana & Simon Weber
Abstract: We study how capital requirements affect bank risk-taking. Our identification exploits the implementation of FAS 166/167: banks, regardless of size or systemic importance, were required to consolidate certain securitized assets onto the balance sheet, resulting in higher capital requirements. The consolidation did not affect risk-taking directly, unless through the increased requirements. We find that the affected banks reduce risk-taking and increase regulatory capital and cost-efficiency. The effects continue to hold for banks with capital buffers, suggesting that capital requirements need not be binding to be effective. The affected banks increase lending to the safest borrowers, after controlling for credit demand.