Impact of the Capital Requirements Regulation (CRR) on the access to finance for business and long-term investments – November 2016

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Sector:Financial markets and Institutions
Client:EC DG for Financial Stability, Financial Services and Capital Markets Union (FISMA)
Published: 23 November, 2016
Document type:Report 
Tagged: EU ex-post evaluation finance qualitative analysis quantitative analysis stakeholder surveys and consultations EC/EEA

The Capital Requirements Regulation (CRR) considerably strengthens the quantity and quality of the minimum capital that banks in Europe are required to hold.

This study assesses whether increased minimum capital requirements, through observed changes in banks’ regulatory capital ratios, impact bank lending using data on a broad sample of banks in Europe, including for the period since the entry into force of the CRR on 1 January 2014.

In the short run we find that an increase in the Total Capital Ratio leads to a statistically significant reduction in bank lending flows, and the estimated effect is robust to a wide range of robustness tests.

In the long run, simulation results based on a calibrated model indicate a negative relationship between bank lending stocks and regulatory capital ratios. However, contrary to the simulation results, our key finding, derived empirically using panel cointegration models, is that the impact of the Total Capital Ratio on bank lending stocks is not statistically different from zero.

Finally, we find no clear evidence of a relationship between increases in the Total Capital Ratio and bank financing of infrastructure through project finance across the models tested. This finding is corroborated by the results of a consultation and survey of banks providing infrastructure finance.

The research was commissioned by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).