Banks' stress-test capital has spurred lending, Fed economists' study says

2 January 2019 6:32pm
The additional capital that banks have had to keep to pass US stress tests has resulted in increased lending, contrary to bank arguments that Dodd-Frank requirements have constricted credit, US Federal Reserve researchers said.

In the broadest study yet of loan categories, the PhD economists found that the equity and cash that banks have added to comply with post-crisis standards has given them the resources to take new lending risks.

“[W]e find that more capital is associated with higher loan growth,” Fed economists William Bassett and Jose Berrospide wrote in the recently posted staff working paper, “The Impact of Post Stress Tests Capital on Bank Lending.”

“Our findings suggest that the increased level of capital and the higher capital buffers brought by the post-crisis regulatory reform, which make banks safer and more resilient, altogether put banks in a better position to lend more, at least across some loan categories,” they wrote.