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Does capital-based regulation affect bank pricing policy?
Dominika Ehrenbergerová1, Martin Hodula2,3, Zuzana Gric4
1Czech National Bank and Charles University, Prague 1, Czech Republic.
Journal of Regulatory Economics
|April 18, 2022
Summary
Changes to capital requirements did not significantly alter Czech banks' pricing policies or loan rates. This study found minimal impact on interest margins, even for smaller institutions, challenging previous research findings.
Area of Science:
- Banking Regulation
- Financial Economics
- Monetary Policy
Background:
- Capital requirements are a key tool for banking supervision.
- The transmission of regulatory changes to bank behavior is a critical area of research.
- Previous studies suggest capital requirements affect lending rates and interest margins.
Purpose of the Study:
- To investigate the impact of capital requirement changes on bank pricing policy in the Czech Republic.
- To analyze the transmission of regulatory adjustments to bank interest margins and loan rates.
- To reconcile findings with existing literature on capital-based banking regulation.
Main Methods:
- Utilized a comprehensive bank-level supervisory dataset from the Czech Republic (2004-2019).
- Employed econometric methods to estimate the effect of capital requirements on bank pricing.
- Segmented analysis to assess impacts on different bank sizes and capitalization levels.
Main Results:
- Estimated changes to overall capital requirements did not significantly alter banks' pricing policies.
- The impact on bank interest margins and loan rates was found to be negligible, near zero across loan categories.
- Results held true even for less-capitalized and smaller banks, ruling out significant effects.
Conclusions:
- The study's findings contradict previous research indicating a significant transmission of capital regulation to lending rates.
- The lack of transmission may stem from specific market conditions or regulatory nuances in the Czech Republic.
- Results provide empirical evidence for the ongoing debate on the costs and benefits of capital-based banking regulation.
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