The Effects of Higher Bank Capital Requirements on Credit in Peru

IMF Working Papers, September 28, 2018

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The Effects of Higher Bank Capital Requirements on Credit in Peru

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Bibliographic details

• Authors: Xiangming Fang, David Jutrsa, Andrea F Presbitero, Lev Ratnovski, Felix J Vardy
• Published: September 28, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484378366.001

Summary and main findings

• The paper offers novel evidence on the impact of raising bank capital requirements in the context of an emerging market: Peru.
• Using quarterly bank-level data and exploiting the adoption of bank-specific capital buffers, the authors find that higher capital requirements have a short-lived, negative impact on bank credit in Peru.
• The negative effect on bank credit becomes statistically insignificant in about half a year.
• The finding is robust to estimating different specifications to address concerns about the exogeneity of capital requirements.
• Possible explanations for the short-lived effects on credit include that the reform was gradual and pre-announced and that banks were highly profitable at the time.

Methodology

• Data frequency: quarterly bank-level data.
• Identification strategy: exploitation of the adoption of bank-specific capital buffers.
• Robustness checks: different model specifications to address concerns about the exogeneity of capital requirements.

Interpretation and robustness

• The short-lived nature of the negative impact suggests transitional frictions rather than permanent credit supply contractions.
• Robustness of results is emphasized through alternative specifications addressing exogeneity concerns.
• Contextual factors highlighted as contributing explanations: gradual and pre-announced reform design; high bank profitability during the reform period.

Policy implications and recommendations

• Gradual and pre-announced increases in capital requirements may mitigate persistent adverse effects on bank credit.
• High profitability in the banking sector can help absorb transitional costs associated with higher capital requirements, limiting long-term credit contraction.
• Policymakers should consider the design and communication of capital reform (timing, pace, and predictability) to reduce short-term disruptions to credit.

Content in this bundle

• The Effects of Higher Bank Capital Requirements on Credit in Peru, WP/18/222, September 2018
  • The Effects of Higher Bank Capital Requirements on Credit in Peru, WP/18/222, September 2018 (Markdown version)
  • The Effects of Higher Bank Capital Requirements on Credit in Peru, WP/18/222, September 2018 (PDF)