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The effect of bank capital on lending: Does liquidity matter?

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  • Kim, Dohan
  • Sohn, Wook

Abstract

This paper uses a sample of quarterly observations of insured US commercial banks to examine whether the effect of bank capital on lending differs depending upon the level of bank liquidity. We find that the effect of an increase in bank capital on credit growth, defined as growth rate of net loans and unused commitments, is positively associated with the level of bank liquidity only for large banks and that this positive relationship has been more substantial during the recent financial crisis period. This result suggests that bank capital exerts a significantly positive effect on lending only after large banks retain sufficient liquid assets.

Suggested Citation

  • Kim, Dohan & Sohn, Wook, 2017. "The effect of bank capital on lending: Does liquidity matter?," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 95-107.
    • Handle: RePEc:eee:jbfina:v:77:y:2017:i:c:p:95-107
    DOI: 10.1016/j.jbankfin.2017.01.011
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    More about this item

    Keywords

    Bank capital; Bank liquidity; Lending behavior; Financial crisis; Basel III;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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