The Effect of Capital Requirements on Bank Lending to Small and Medium-Sized Enterprises

Abstract: This thesis examines the effect of strengthened capital requirements on the supply-side of bank lending to Small and Medium-Sized Enterprises (SMEs) in Europe. The thesis further assesses the effect of capital buffers on lending to SMEs in addition to examining how different bank lending practices are affected by stricter capital requirements. SMEs are of particular importance to policymakers since they heavily depend on bank financing and are an important part of the European economy. Using data from 10 different countries and 70 banks in Europe from 2008 to 2015, we estimate our model using a System Generalized Method of Moments. We find that a 1 percentage point increase in the Tier 1 ratio will result in a decrease of 1.24 percentage point of lending to SMEs. Furthermore, we find that transaction-based banks are more adversely affected than relationship-based banks by increased capital requirements, and we find a negative relationship between the capital buffers and lending to SMEs.