The aim of this paper is to empirically investigate the effects of bank capital requirements on the lending activity of banks and non-bank financial institutions (NBFIs). Our work examines the spillover effects of banking regulation and helps to assess its impact on the distribution of risks in the system and on the overall financial stability. This aspect has very limited coverage in the previous literature and is particularly important in the environment of low interest rates, which could intensify the competition between commercial banks and NBFIs seeking positive yields. Moreover, our results contribute to the policy discussion on the growing importance of NBFIs. The emerging prominence of the NBFI sector reshapes the financial system, could give rise to new sources of risk and even impair the monetary policy transmission mechanism (Schnabel, 2021).

In this study, we exploit a sudden and sizeable increase in bank capital requirements imposed by the European Banking Authority (EBA) within the framework of its capital exercise in 2011. Employing data from the German credit register, we conduct a difference-in-differences analysis to compare the change in the lending activity of different types of lenders around the EBA capital exercise. The capital exercise included 13 German banks (EBA banks), while it did not have a direct effect on other banks (Non-EBA banks) and on NBFIs. In this paper, we specifically focus on the NBFIs that have exposure vis-à-vis real sector firms and are subject to the credit register reporting. These are financial services institutions, insurance companies, financial enterprises, non-monetary financial institutions, capital investment companies, equity-holding companies, and bad banks. Moreover, the credit register allows us to consider NBFIs not only as lenders but also as borrowers.

We document that following the EBA capital exercise the NBFIs and the Non-EBA banks slowdown their lending to the real sector firms less than the EBA banks by an extra 2.2 and 1.6 percentage points per quarter, respectively. Among the NBFIs, the effect is the most evident for insurance companies, financial enterprises, and factoring companies. Moreover, NBFIs use the opportunity to expand their credit activities, in riskier and more competitive borrower segments.