Time-varying Capital Requirements and Disclosure Rules: Effects on Capitalization and Lending Decisions of Banks

Unique and confidential Danish data allow us to identify how changes in disclosure requirements and bank-specific time-varying capital requirements affect banks' lending and capital accumu-lation decisions. We find that banks increase their capital ratios after capital requirements are increased, implying that resilience in the banking system is also increased. The increase in capital ratios is partly due to a modest reduction in lending. Using a policy changes, we show that banks react stronger to changes in capital requirements when these are public. Our results further suggest that the impact of capital requirements differ for small and large banks. Large banks raise their capital ratios more, reduce lending less, and accumulate more new capital compared to small banks.