Time-Varying Capital Requirements and Disclosure Rules: Effects on Capitalization and Lending Decisions

We investigate how banks' capital and lending decisions respond to changes in bank-specific capital and disclosure requirements. We find that an increase in the bank-specific regulatory capital requirement results in a higher bank capital ratio, brought about via less asset risk. A decrease in the requirement implies more lending to firms but also less Tier 1 capital and higher bank leverage. We do not observe differences between confidential and public disclosure of capital requirements. Our results empirically illustrate a trade-off between bank resilience and a fostering of the economy through more bank lending using banks' capital requirement as policy instrument.