Inconsistent Regulations : Evidence from a Sudden Change in Bank Lending Requirements

Inconsistently applied regulations are a hallmark of the U.S. banking system. Because many regulations only apply to a subset of banks, competition and other interactions in lending and deposit markets can both contribute meaningfully to a regulation's overall effect and also invalidate the research designs of many studies of bank regulations. We examine a sudden increase in a little-known minimum bank lending requirement to demonstrate the issues that result from inconsistent regulation. By using a within-bank identification strategy, we show that the regulated banks expanded credit supply. However, we also find that this increase in lending was largely offset by a substantial decline in lending activity among banks that were not subject to the regulation. These findings highlight the pitfalls of many bank regulation studies that estimate treatment effects by using unregulated banks to form counterfactuals. Our results further demonstrate that policymakers must consider a regulation's effects on untargeted institutions in both the design and evaluation of regulatory policy