Capital ratios and bank lending: A matched bank approach |
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| Institution: | 1. Board of Governors of the Federal Reserve System, Washington, DC, United States;2. Goldman Sachs, New York, NY, United States;1. Departamento de Economía, Universidad Diego Portales, Chile;2. Centro de Economía Aplicada, Departamento de Ingeniería Industrial, Universidad de Chile, Chile;3. University of Pennsylvania, United States;1. De Nederlandsche Bank and Financial Stability Board, Centralbahnplatz 2, 4002 Basel, Switzerland;2. De Nederlandsche Bank, Westeinde 1, 1017ZN Amsterdam, The Netherlands;1. American Enterprise Institute, 1789 Massachusetts Avenue, NW, Washington, DC 20036, United States;2. Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429, United States;3. Mason School of Business, College of William & Mary, P.O. Box 8795, Williamsburg, VA 23187, United States;1. OG Research, Sibeliova 41, Prague 6, 16200, Czech Republic;2. The Research Hub, Bank of England, Room 332, HO-2 B-D, Threadneedle Street, London EC2R 8AH, United Kingdom;1. Banco de Portugal, Avenida Almirante Reis 71, 1150-012 Lisbon, Portugal;2. Macroprudential Research Team, Macroprudential Analysis Department, Bank of Korea, 39 Namdaemunno, Jung-Gu, Seoul, South Korea |
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| Abstract: | This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2011, that the relationship between capital ratios and bank lending was significant during and shortly following the recent financial crisis but not at other times. We find that the relationship between capital ratios and loan growth is stronger for banks where loans are contracting than where loans are expanding. We also show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear. In addition, we present findings on the relationship between bank capital and lending by bank size and loan type. |
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| Keywords: | Regulatory capital Bank capital Bank lending |
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