Gloria Nieto/The Globe and Mail
So much for that old chestnut.
As global banking regulators hashed out new rules in the wake of the financial crisis, a slew of lobbyists and bankers argued that tougher capital standards would hurt the economic rebound. If the banks had to hold more capital, they would have to cut back on their lending, the thinking went, hindering business expansion.
It turns out that was probably just fear-mongering. A thorough study from the Bank for International Settlements (BIS) – a global research leader – found that the stringent new capital standards did little to hurt lending.
"Banks in aggregate do not appear to have cut back sharply on asset or lending growth as a consequence of stronger capital standards," the study concludes, basing its findings on hard data.
To test the theory, the BIS first looked at capital levels, which are undoubtedly higher today. Weighted average capital ratios for "large, internationally-active banks" climbed to 9.2 per cent at the end of 2012, up from 5.7 per cent at the end of 2009, while smaller banks saw theirs jump to 9.4 per cent from 7.8 per cent. Leverage ratios, which do not weight bank assets by risk, also moved higher for both sets of banks.
To assess lending, the BIS first relied on survey data. The verdict: responses from bank lending officers in different economies "do not point to a sustained tightening of lending standards across all global regions in recent years," the report stated. While there were ebbs and flows – the U.K. had some trouble in mid-2012, and the euro area has also seen tighter bank lending conditions, especially in the second half of 2011 when the sovereign debt crisis was in full swing – for the most part the surveys say lending has improved.
Then there are lending spreads, which show signs of improvement despite the higher capital levels. Corporate bond spreads between notes rated Baa and Aaa "have been stable or narrower since the crisis," the BIS found.
Finally, the BIS studied the numbers. Using a sample of 94 banks – including the Big Six Canadian lenders – the researchers confirmed that lending, on average, has expanded. For the U.S. banks, gross lending grew by 10.3 per cent from 2009 to 2012. The big outlier is the euro area, which saw gross lending fall 9.5 per cent. Total lending for all banks in the BIS sample grew 13.1 per cent.
The big reason most banks haven't had to cut back lending is because they've seen their profits roar back, which they can turn into retained earnings – the portion of profits that they do not pay out in dividends. So instead of having to sharply adjust their lending or asset growth to affect the numerator of the capital ratio, they are piling up profits to boost the denominator.
Still, there are differences between banks. The BIS found that lenders who had high capital ratios or strong profitability at the start of sample period had better success lending than those with who had to dramatically boost their capital levels. And the sample period itself is arguably skewed because 2009 was such a slow year for lending to begin with.
But there are caveats in every sample. If you take the results in their most basic form, the BIS found that bank lending expanded even though capital levels grew more robust. That strikes right to the heart of the naysayers' arguments.
Tim Kiladze