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The impact of bank regulation on the cost of credit: Evidence from a discontinuity in capital requirements

29 gennaio 2020 ore 12:00 - 14:00

Aula 207, Sede di Viale Romania, 32

Speaker: Stefano Pietrosanti, University of Pennsylvania

Abstract:

"We study the effect of a change in minimum capital requirements onthe cost of credit. We exploit a reduction of the risk weight applied to loans to smalland medium enterprises, whose exposure is below a threshold (the Small and MediumEnterprises Supporting Factor). Employing a regression discontinuity design and matchedbank-firm data from the Italian Credit Register, we infer an average reduction in interestrates of 9.5 basis points per percentage point drop in minimum capital requirements.We also find that the estimate of the effect is larger, between 12.5 and 15.5 basis pointsper percentage point change, for borrowers that have low costs of switching betweenbanking relationships. We interpret this result as evidence that the pass-through ofcapital discounts to borrowers depends on the extent to which banks exercise monopolypower. We suggest that competition between lenders is important for the effectiveness ofchanges in banks’ capital buffers as a macro-prudential policy tool."