The transmission of bank capital requirements and monetary policy to bank lending in Germany

• Author: Ursula Vogel,Björn Imbierowicz,Axel Löffler
• DOI: http://doi.org/10.1111/roie.12500
• Published date: 01 February 2021
• Date: 01 February 2021

144

|

Rev Int Econ. 2021;29:144–164.

wileyonlinelibrary.com/journal/roie

Received: 30 November 2019

|

Revised: 15 July 2020

|

Accepted: 4 September 2020

DOI: 10.1111/roie.12500

SPECIAL ISSUE PAPER

The transmission of bank capital requirements and

monetary policy to bank lending in Germany

BjörnImbierowicz1

|

AxelLöffler2

|

UrsulaVogel2

1Research Centre, Deutsche Bundesbank,

Frankfurt, Germany

2DG Financial Stability, Deutsche

Bundesbank, Frankfurt, Germany

Correspondence

Björn Imbierowicz, Research Centre,

Deutsche Bundesbank, Wilhelm-Epstein-

Strasse 14, 60431 Frankfurt, Germany.

Email: bjorn.imbierowicz@gmail.com

Ursula Vogel, DG Financial Stability,

Deutsche Bundesbank, Wilhelm-Epstein-

Strasse 14, 60431 Frankfurt, Germany.

Email: ursula.vogel@bundesbank.de

Abstract

We investigate the transmission of changes in bank capi-

tal requirements and monetary policy, and their interaction,

on German banks’ corporate loan growth and lending rates.

Our results show that increases in capital requirements are

associated with an immediate decrease in total domestic and

cross-border bank lending. Changes in the euro area's mon-

etary policy stance are positively related to corporate loan

interest rates in general. Regarding the interacting effect of

national bank capital requirements and euro area monetary

policy, we observe that the transmission of accommodative

euro area monetary policy to corporate lending rates can be

attenuated by contemporaneous increases in bank capital

requirements. Moreover, more strongly capitalized banks

increase their loan growth in response to accommodative

monetary policy whereas, for weaker banks, increasing

capital requirements implies a decrease in their corporate

loan growth. Our results confirm a tradeoff between higher

capital requirements and accommodating monetary policy

originating from banks’ capital constraints.

JEL CLASSIFICATION

E52; F30; G28

[Correction added on 12 January 2021, after first online publication: Ursula Vogel was designated as co-corresponding author.]

This is an open access article under the terms of the Creat ive Commo ns Attri butio n-NonCo mmercial License, which permits use, distribution

and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

© 2020 The Authors. Review of International Economics published by John Wiley & Sons Ltd

|

145

IMBIEROWICZ Et al.

1

|

INTRODUCTION

After the global financial crisis, banking regulation in Europe underwent a comprehensive overhaul,

in particular with respect to bank capital. Microprudential capital requirements were tightened and

complemented with several macroprudential measures to provide regulators with (further) tools which

could address systemic risks. At the same time monetary policy—in the euro area as well as in other

major economies—was characterized by an accommodative monetary policy stance. As the banking

system is a major transmission channel for monetary policy and capital regulation alike, the impli-

cations of the two policies with respect to bank lending and interest rates1 deserve closer attention.

This paper aims to contribute to the understanding of the transmission of bank capital requirements as

well as international monetary policy, and the interaction between the two policies, on euro area bank

lending and the corresponding interest rates. Consequently, it sheds light on domestic as well as inter-

national implications of national and international policy interactions, focusing on immediate effects.

Both policies have been investigated in the empirical literature, though often only separately. The

evidence on the immediate effects of changes in bank capital requirements is mixed. Aiyar, Calomiris,

and Wieladek (2014) observe a decrease in lending in response to higher capital requirements, while

a survey by the Basel Committee on Banking Supervision (1999) of more than 130 research papers

on the effects of Basel I suggests that this is the case in economic troughs only. Other studies argue

that the effects depend on the industry sector (Bridges et al., 2014), bank dependency (Gropp, Mosk,

Ongena, & Wix,2018), banks’ rating approach (Behn, Haselmann, & Wachtel,2016), or bank type

(De Jonghe, Dewachter, & Ongena, 2020). Jiménez, Ongena, Peydro, and Saurina (2017) investigate

dynamic provisioning of capital requirements and find that it helps smooth the credit cycle. Francis

and Osborne (2012) and Imbierowicz, Kragh, and Rangvid (2018) show that banks tend to adjust the

risk composition of their asset portfolio in response to an increase in capital requirements rather than

the volume of loan portfolios. Further implications hinge on the time horizon analyzed. Some papers

examining the long-term implications find transitory adverse implications (see e.g., Eickmeier, Kolb,

& Prieto, 2018); in the long run, higher bank capital seems associated with higher loan volumes

(see e.g., Buch & Prieto, 2014 for an analysis of the German banking system). As to the impact of

monetary policy, the results in the literature suggest that its effects on bank lending depend on banks’

risk.2 While the central bank policy rate has an effect on banks’ risk-taking and leverage, and there-

fore financial stability (for an overview, see e.g., Gambacor ta,2009), prudential capital requirements

generally induce a change in banks’ funding mix and accordingly their costs, and thereby affect their

response to policy changes. Some more recent studies have also looked into the interaction between

the two policies. Takáts and Temesvary (2019) find significant interactions between macroprudential

policy in general and monetary policy associated with the currency of cross-border bank lending.

Tighter macroprudential policy mitigates the lending impact of monetary policy, whereas an ease of

macroprudential policy amplifies the lending impact of monetary policy. Some studies investigate the

interaction between monetary policy and bank capital requirements. Aiyar, Calomiris, and Wieladek

(2016) find in a study for the United Kingdom that a tightening of both capital requirements and mon-

etary policy reduces bank lending. However, they find little evidence of an interaction between the

two policy instruments. De Marco and Wieladek (2016) also study bank-specific capital requirements

and monetary policy in the United Kingdom and the consequences for SMEs. They find that effects

differ depending on the bank-firm relationship and firms’ dependency on banks, as well as bank and

firm characteristics. Empirical evidence presented by Budnik and Bochmann (2017) shows that the re-

sponse of better capitalized banks’ loan growth to changes in monetary policy is less severe. Relatedly,

Gambacorta and Mistrulli (2004) and Maddaloni and Peydro (2013) illustrate that lending by poorly

capitalized banks responds more strongly to changes in monetary policy rates. Eickmeier et al. (2018)