We investigate whether ratings-based capital regulation has affected the finance-growth nexus via the foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 country banks to 67 borrower countries over time, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have led to significant economic growth in investment grade countries. However, rating upgrades large enough to reduce risk weights had the opposite impact of significantly reducing growth in non-investment grade borrower countries. We point this to a combination higher levels of risk taking by lending banks and the financial market underdevelopment in the borrower countries. The impact of rating upgrades is strongest over the one year growth horizon and then tend to reduce or even reverse over longer horizons. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to downgrades across both types of borrower countries. The adverse effects of capital regulation on bank credit supply and economic growth are compounded with more corruption and less competitive banking sectors but ameliorated with greater political stability.