estimates of the a2 and b2 parameters. The a2 parameter, which defines the relationship between changes of bank deposits and changes of bank capital, reveals the presence (if positive) of a capital crunch. As shown in Section 3.3, such an impact is expected to decrease with the level of banks' initial leverage ratio (capital over total assets), since higher capital requirements should have a stronger impact on undercapitalized banks. This effect is identified by a3 and b3 parameters, provided that potential demand side shocks are controlled for by the logarithm of total assets (Log(A)), and country/time varying effects are captured by the vector of macro variables X. Vector X includes real GDP growth, the local exchange rate as currency units per US dollar and the local nominal interest rate.<sup>19</sup> The vector DyTincludes year dummies, having as reference category the year preceding the enforcement. Both regressions include a full set of bank fixed effects **_Pb_** and normal i.i.d. random errors, **_ED ,EL_** respectively.

This methodology can be applied straightforwardly to banks in crisis countries. Indeed, in crisis countries banks normally suffer macro negative shocks to their capital. Our expectation is that not only _AUL/A_ will be positively related to the change in banks' capital endowment, but also _AD/A_ will exhibit the same feature. Should we obtain this result, we will be able to claim that the capital constraints associated with the enforcement of the CARs did shrink bank intermediation, thus further reducing the supply of credit. Such a result should be reinforced where the negative impact of a crisis on bank capital has been strengthened by a more severe enforcement discipline. Typically we would expect the effect of the change in capital to be smaller for banks which have higher initial leverage ratios (i.e. Capital/Total assets). Correspondingly, we expect the estimates of the a3 and b3 coefficients to be negative, proving that the effect of the change in capital decreases when the ratio of capital over total assets increases.

Due to the panel structure of regressions (6) and (7), we cannot expect to catch the specific effects associated to undercapitalized banks or banks owned by foreign Western investors by means of specific dummies. For this reason we have integrated our panel estimations with cross section regressions, where banks' fixed effects have been replaced by the control variables _Dlow_ and _Djb._ The first variable regards undercapitalized banks suffering a drop in total assets (here the dummy _Dlow_ = 1)2 which represent 35% of the crisis-sample banks (Table 4). The second variable concerns banks that are owned by foreign Western investors (here the dummy Djb = 1), which represent one fourth of our sample (Table 4). For the reasons outlined above, these banks may cope better with the regulatory restriction.

The methodology embedded in equation (6) and (7) does not deliver equally clear results for non-crisis countries. There is, in fact, no guarantee that negative capital shocks will prevail for banks in countries that are enforcing CARs during a non-crisis period. Any attempt to select banks exposed to negative capital shocks falls into a small sample problem, given that the non crisis sample includes 146 banks, only 37.5% of which has

> 19 Source: International Financial Statistics by the IMF.

> 2 0 The dummy _Diow_ takes the value 1 if the bank has a capital asset ratio lower than the country median the year before the enforcement, 0 otherwise.

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