Effect of bank capital requirements on economic growth

This paper reviews studies exploring how higher bank capital requirements affect economic growth. There is little evidence of a direct effect; research focuses on the indirect effects of capital requirements on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth. Banks facing higher capital requirements can reduce credit supply as well as decrease credit demand by raising lending rates which may slow down economic growth. However, having better-capitalized banks enhances financial stability by reducing bank risk-taking incentives and increasing banks’ buffers against losses.                                                                                           
 
Keywords: bank capital requirement, credit growth, financial stability, economic growth, cost of equity.
JEL classifications: G21, G28.

Working paper no. 467