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The interaction between capital requirements and monetary policy is assessed by means of simple rules in a dynamic general equilibrium model featuring a banking sector. In \"normal\" times, when economic dynamics are driven by supply shocks, an active use of capital requirements generates modest benefits in terms of volatility of the target variables compared to the case in which only the central bank carries out stabilization policies. The lack of cooperation between the two policymakers may result in excessive volatility of the monetary policy rate and capital requirements. The benefits of introducing capital requirements become sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics; the availability of capital requirements as a policy tool yields a significant gain in terms of macroeconomic stabilization, regardless of the type of interaction between monetary and capital requirements policies.

We investigate how banks' capital and lending decisions respond to changes in bank-specific capital and disclosure requirements. We find that an increase in the bank-specific regulatory capital requirement results in a higher bank capital ratio, brought about via less asset risk. A decrease in the requirement implies more lending to firms but also less Tier 1 capital and higher bank leverage. We do not observe differences between confidential and public disclosure of capital requirements. Our results empirically illustrate a tradeoff between bank resilience and a fostering of the economy through more bank lending using banks' capital requirement as policy instrument.

We examine the relationship between environmental, social, and governance (ESG) scores and working capital management in 4,212 traded firms across 65 countries (2010-2023), emphasizing the role of financial constraints. We find that higher ESG scores, mainly driven by environmental and social pillars, are associated with lower working capital requirements. When disaggregating the cash conversion cycle components, we observe that ESG-strong firms collect payments from customers more quickly and secure extended payment terms from suppliers, reflecting trust-based relationships and more efficient liquidity strategies. ESG performance is associated with a mitigation of the impact of financial constraints, suggesting that sustainability practices enhance financing conditions. These results are robust to propensity score matching and industry-adjusted specifications. Our findings highlight ESG as a strategic lever for improving liquidity efficiency and managing capital-market friction through enhanced stakeholder engagement.

Over the past fifteen years, the Bank of Ghana has revised the minimum capital requirement to stabilize the banking sector. Motivated by the unintended consequences of regulatory capital, this paper provides empirical evidence between minimum capital requirement and bank performance relationship in Ghana. We draw data on a sample of 20 universal banks spanning 2008 to 2017. The Panel Corrected Standard Errors (PCSE) estimation was adopted. The results indicate that the minimum capital requirement has a significant positive impact on bank performance measured by return on assets (ROA) and equity (ROE). However, the effects turned negative after 1.7% and 1.6% performance thresholds for ROA and ROE, respectively. Given this, the study establishes the relationship between capital requirement and bank performance in Ghana to be double-edged. The capital requirement improves bank performance initially, but bank performance worsens after the threshold values. Policy implications for Ghana's banks, regulators, and policymakers have been provided based on the findings.

Purpose This study aims to examine the triple relationship between capital regulation, banking lending and economic growth in a dual markets. Specifically, the author seeks to explore how changes in capital regulation can impact banking lending practices and subsequently influence economic growth, while also investigating the reciprocal effects of banking lending on economic growth. Design/methodology/approach The author follows several previous studies such as Shrieves and Dahl (1992), Beck and Levine (2002), Altunbas et al. (2007), Saeed et al. (2020) and Stewart et al. (2021) to identify a system of three equations, regarding economic growth, capital and banking financing growth, respectively. The author estimates the parameters of all equations simultaneously using the seemingly unrelated regression method (Zellner, 1962) for a sample of 46 Islamic banks and 113 conventional banks during 2002–2022. These banks operate in 13 Muslim countries from Middle East and North Africa and Southeast Asia. Findings The author’s findings demonstrate that in the case of Islamic banking, an increase in loan growth stimulates economic growth, while an increasing capital ratio positively influences economic growth but is accompanied by a reduction in loan growth. This result corroborates the findings of Stewart et al. (2021), which indicate that regulatory capital reduces unstable credit while improving gross domestic product growth. However, in the case of conventional banks, the response to an increase in loan growth on Gross Domestic Product Per Capita Growth (GDPCG) is ambiguous, while the capital ratio improves GDPCG and promotes LOANG, which, in turn, increases risk. Practical implications The Islamic banks can continue to significantly contribute to economic growth by effectively directing their available capital toward viable investment opportunities and supporting sustainable financial practices, even in the presence of potential constraints on loan growth. As for conventional banks, they are invited to increase their capital levels to ensure a strong and resilient financial system that can support lending and facilitate economic growth. Originality/value To the best of the author’s knowledge, this paper is the first to explore the triple relationship between capital requirements, Islamic bank lending and economic growth.

PurposeWe study how capital requirements, intended as a measure to ensure security for the financial system, can create moral hazard for banks in dealing with distressed debts.Design/methodology/approachOver the period spanning from 1993 to 2019, we manually gathered data on 1953 firms, identifying a total of 2,146 distress events, with 804 instances resulting in bankruptcy fillings.FindingsOur analyses at the loan level and the bank level consistently show that loans of distressed firms are much more likely to be extended when the lenders are closer to the capital requirement limit. Exploiting the discontinuity in the predetermined maturity date of loans, we provide causal evidence on the relationship between capital ratios and extension likelihood. Distressed loans that are due just before the report date (end of a quarter) are much more likely to be extended than loans due just after the report date, after controlling for loan and firm characteristics. Additional analyses show that the effects are stronger when external financing is more costly and when the banks are poorly capitalized.Originality/valueOur paper presents the first causal evidence of capital requirements on lending distortion, contributing to our understanding of the dynamics within the banking sector and providing policy implications for promoting financial stability and regulatory efficacy.

This paper examines banks' choice between fair-value and historical-cost accounting when reported accounting information is used in capital requirement regulation. We center our analysis on a key difference between fair-value and historical-cost accounting: the frequency with which asset value changes are reported. We show that the elasticity of banks' loan returns to aggregate lending is a critical determinant of the interaction between capital adequacy requirements and accounting choices. If lending returns are inelastic, then higher capital requirements reduce fair-value usage. By contrast, higher capital requirements encourage fair value if capital requirements are low and lending returns are sufficiently elastic. In equilibrium, banks may elect different accounting choices, and we find that mandating uniform adoption of historical cost (fair value) is desirable when capital requirements are loose (tight). Our study offers many other implications about fundamental links between accounting and prudential choices.

The study examines the nexus between Basel capital requirements, banking sector risk-taking, and profitability in Asian emerging markets by using dynamic panel GMM methodology. The findings of the study suggest that regulatory capital positively affects risk-taking which validates the \"regulatory hypothesis.\" The findings also reveal that regulatory capital positively while risk negatively affects the profitability in the banking sector. The current study finds the bidirectional causality between the regulatory capital and risk-taking, implying that banks with higher capital ratios are expected to increase in risk-taking and vice versa. The findings also suggest that managerial ownership positively affects while foreign ownership negatively impacts risk-taking consistent with the agency theory of corporate governance. The study proposes that ownership structure has a significant influence on bank risk and profitability, however, the combined impact of regulatory capital through its interaction with the ownership structure is not proved to be significant.

This paper studies the stability properties of inflation-targeting interest rate rules in an economy with regulatory capital requirements. We derive the conditions for rational expectations equilibrium determinacy in a sticky-price model augmented with the cost channel of monetary policy transmission. We find that when tightening Basel II-type capital regulations, strict inflation targeting leads to significant expansions in regions of determinacy. This result is attributed to the supply side of credit markets, and especially to the procyclical nature of bank leverage and the restricted interest rate pass-through. However, when banks maintain capital ratios beyond the required thresholds, strict inflation targeting suffers from considerable shrinking regions of determinacy. Moreover, excessive bank capital holdings may give rise to self-fulfilling business cycles. The availability of countercyclical capital buffers, as proposed by Basel III, and/or a flexible inflation targeting regime offer an antidote to these problems.