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Capital ratios and bank lending: a matched bank approach

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Author Info

  • Mark Carlson
  • Hui Shan
  • Missaka Warusawitharana

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 2009, that the relationship between capital ratios and bank lending is insignificant until the recent financial crisis. We also find that the effect of capital ratios on loan growth varies by type of loan, with some of the strongest effects in recent years being for commercial real estate loans. Finally, we 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.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-34.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-34

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Keywords: Bank capital ; Bank loans;

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References

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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
  4. 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.
  5. 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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