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Banks' Equity Capital Frictions, Capital Ratios, and Interest Rates: Evidence from Spanish Banks


  • Alfredo Martin-Oliver

    (Universitat de les Illes Balears)

  • Sonia Ruano

    (Banco de Espana)

  • Vicente Salas-Fumas

    (Universidad de Zaragoza)


Banks’ choices on their economic capital factor into the cost of funds and are key to the assessment of the social cost from higher equity capital ratios set by Basel III. We model the determinants of equity capital and the influence of its ratios on the interest rates of bank loans by using data from Spanish banks. The results show that a combination of valuemaximization choices and inertial earnings retentions determine equity capital and that the inertia component is more important to savings banks than to commercial banks. We also find that loans’ interest rates increase with equity capital and the increase is higher during the adjustment period than in the steady state.

Suggested Citation

  • Alfredo Martin-Oliver & Sonia Ruano & Vicente Salas-Fumas, 2013. "Banks' Equity Capital Frictions, Capital Ratios, and Interest Rates: Evidence from Spanish Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 183-225, March.
  • Handle: RePEc:ijc:ijcjou:y:2013:q:1:a:8

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    References listed on IDEAS

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    Cited by:

    1. Giacomo Carboni & Christoffer Kok & Matthieu Darrak Paries, 2014. "Exploring the Nexus Between Macro-Prudential Policies and Monetary Policy Measures: Evidence from an Estimated DSGE Model for the Euro Area," Working Papers BFI_2013-005, Becker Friedman Institute for Research In Economics.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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