The impact of bank regulation on bank lending: A review of international literature

Abstract

This paper reviews the theoretical and empirical literature on the impact of bank regulation on bank lending. It also structures the empirical evidence according to the impact of various bank regulatory measures on bank lending. The surveyed theoretical literature generally indicates that the impact of bank regulation on lending could be asymmetric, depending on the trade-off between the costs and benefits of bank regulation. The evidence from the empirical studies also shows that the impact of bank regulatory measures on lending is ambiguous. Although many studies found the impact to be negative, some established that it was positive while others found it to be insignificant or inconclusive. However, most empirical studies only assumed first-round effects using static and/or dynamic models, whereas the ones incorporating second-round effects using general equilibrium models were limited. Therefore, this systematic review of the literature indicates that policy recommendations regarding the appropriateness and efficacy of bank regulatory measures in influencing bank lending cannot be implemented uniformly across different regions or countries.