Bank Lending Constraints in the Euro Area

Summary:

This paper constructs stylized scenarios to assess the lending constraints faced by the banking sectors of euro area Member States arising from a combination of low profitability, adverse bank equity markets and the phase in of new capital requirements. In this connection, it also presents a comprehensive review of the potential sources of increases in minimum bank capital requirements, providing projections for their evolution at Member State level. The combination of the aforementioned factors is seen to carry the potential to significantly constrain bank lending over the period of transition to higher capital ratios which, according to DSGE model simulations, can noticeably impair growth and investment levels in the short run.

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