Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity
IMF Working Papers, June 19, 2020
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- Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity
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Bibliographic details
- Authors: Deniz O Igan, Ali Mirzaei
- Published: June 19, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513548104.001
Publication metadata
- Authors: Deniz O Igan, Ali Mirzaei
- Date: June 19, 2020
- Series: Working Paper No. 2020/103, Issue: 103, Volume: 2020
- Pages: 64
- DOI: https://doi.org/10.5089/9781513548104.001
- ISBN: 9781513548104
- ISSN: 1018-5941
Research question and scope
- Whether and to what extent tougher bank regulation weighs on economic growth is an open empirical question.
- Sample and period: data from 28 manufacturing industries in 50 countries around the period of the global financial crisis.
- Policy context: evaluation of cross-country differences in bank liquidity and capital levels and their association with sectoral activity; relevance to Basel III prudential measures.
Main empirical approach
- Cross-country, cross-industry comparison focusing on industries' dependence on external finance and country-level bank liquidity and capital ratios.
- Outcome measures emphasized: investment rates and the creation of new enterprises.
Key findings
- Industries more dependent on external finance, in countries where banks had higher liquidity and capital ratios, performed relatively better during the crisis with regard to:
- investment rates, and
- the creation of new enterprises.
- The observed positive relationship holds only for:
- bank-based systems, and
- emerging market economies.
- In the pre-crisis period, there is only a marginal link between sectoral activity and bank capital.
- Findings survive a battery of robustness checks.
- Implication: evidence provides some solid support for the tighter prudential measures introduced under Basel III.
Subject areas and keywords
- Subjects: Asset and liability management; Banking; Basel III; Capital adequacy requirements; Financial crises; Financial regulation and supervision; Liquidity; Liquidity requirements.
- Keywords: bank capital; Bank liquidity; Basel III; Capital adequacy requirements; capital level; capital position; capital requirement; capital standard; economic activity; external finance dependence; Financial stability; Global; investment rate; Liquidity; liquidity level; Liquidity requirements; net income; return on equity; Sectoral activity; WP
Policy implications and interpretation
- Higher bank liquidity and capital ratios are associated with comparatively better sectoral outcomes for externally finance-dependent industries during the crisis, suggesting:
- Tighter bank prudential standards may mitigate adverse sectoral impacts in times of stress, particularly in bank-based and emerging market contexts.
- Limited evidence of adverse effects in the pre-crisis period (only a marginal link to bank capital) reduces concern that higher capital/ liquidity requirements broadly suppressed sectoral activity before the crisis.
Robustness and limitations (as reported)
- Results are stated to survive numerous robustness checks.
- The positive associations are context-specific (bank-based systems; emerging market economies) and are not reported as universal across all countries or periods.
IMF Working Paper — "Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity", Deniz O Igan and Ali Mirzaei, June 19, 2020.
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- Working Paper