Adjustment in banks’ capital ratios and its effects on Portuguese SMEs

Abstract

We will study the credit supply effects of the unexpected regulation in capital ratios (LTD ratio) imposed by the Troika under the Economic Adjustment Program for Portugal, using an exhaustive Portuguese loan-level data for SMEs. The introduction of LTDs ratios regulations may force banks to reduce their exposure to credit markets and in order to adequate its balance sheet, banks can reduce lending for firms causing funding problems to companies. In order to evaluate the impact of this regulation, we will have to construct a variable to measure the degree of exposure of firms’ to more or less affected banks. Therefore, we will have to control for several firm-level balance sheet variables and sales to account for market demand. Using data from Central Balance Sheet provided by Banco de Portugal, an extensive dataset containing balance sheet variables for a representative number of firms operating in Portugal, we conclude that in fact the LTD ratio policy had an impact in firms’ investment during the period of analysis.