Indeed, taken at face value, it would suggest there have been virtually no costs of achieving higher levels of capital across the global banking system, at least among most global banks. While credit conditions have clearly improved since the crisis, it is possible that the recovery in lending might have been stronger still had capital requirements risen by less. To begin to analyse that question, Chart 16 compares the change in bank capital since Basel III was introduced with subsequent lending growth among a panel of large international banks. On average, lending growth has been positive over this period, consistent with Cecchetti (2014). But credit growth has also tended to be statistically significantly lower among banks that have seen the largest increase in their capital ratios. On average, banks that have increased their capital ratios by an extra one percentage point have provided 4% less in cumulative credit since Basel III was introduced (3.5% less if we exclude European banks). This is very similar to the estimates used by the FSB’s Macroeconomic Assessment Group (2010), which reported a range of estimates from -0.7% to -3.6%. There are of course different possible interpretations of this negative relationship. Banks facing weak macroeconomic conditions may simply have seen a reduction in loan demand and responded by maintaining higher capital buffers on a voluntary basis. To parse these conflicting interpretations, we turn to recent econometric evidence on the impact of higher capital requirements.
  Euro area countries have taken rapid and significant steps to bring their public finances back into balance and going forward to restore the competitiveness of their economies. This is clearly the case for countries whose debt markets have been the most affected over the past months.   Yet, in May, financial markets started to seize up again, admittedly in a slightly different way than that seen in 2008, but with the same potentially disastrous consequences, that is to say a drying up of financing for the economy. In 2008, the financial system was badly impacted by the subprime crisis and the failure of Lehman Brothers that brought transactions to a standstill as market participants realised that any bank, no matter how big, can fail especially since the exact amount of exposure to subprime risk of all institutions were not fully known. In the May 2010 episode, the same dynamics were at work: the different investors started to believe that euro area countries could default on their debt, and therefore stopped lending to these countries or their banks, or to any banks with possible exposure to these countries and, finally, as a precaution, ceased all lending activity. This situation called for rapid and decisive action by the ECB because:   We cannot implement monetary policy in dislocated markets that do not effectively allocate the liquidity that we inject or that radically modify the effects of our monetary policy by offering interest rates that are inconsistent with our key rates.