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Capital ratios and bank lending: A matched bank approach

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  • Carlson, Mark
  • Shan, Hui
  • Warusawitharana, Missaka

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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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 22 (2013)
Issue (Month): 4 ()
Pages: 663-687

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Handle: RePEc:eee:jfinin:v:22:y:2013:i:4:p:663-687

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Web page: http://www.elsevier.com/locate/inca/622875

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Keywords: Regulatory capital; Bank capital; Bank lending;

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Cited by:
  1. Martha López & Fernando TenjO & Héctor Zárate, 2013. "Credit Cycles, Credit Risk and Countercyclical Loan Provisions," Borradores de Economia 788, Banco de la Republica de Colombia.
  2. Huberto M. Ennis & Alexander L. Wolman, 2012. "Large excess reserves in the U.S.: a view from the cross-section of banks," Working Paper 12-05, Federal Reserve Bank of Richmond.
  3. Francis, William, 2014. "UK deposit-taker responses to the financial crisis: what are the lessons?," Bank of England working papers 501, Bank of England.
  4. Junxun Dai, 2013. "Capital Constraints and the Credit Structure of Commercial Banks: Evidence from China," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 109-123, December.
  5. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
  6. Huang, Haifang & Stephens, Eric, 2011. "From Housing Bust to Credit Crunch: Evidence from Small Business Loans," Working Papers 2011-15, University of Alberta, Department of Economics.

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