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Why bank capital matters for monetary policy

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  • Leonardo Gambacorta
  • Hyun Song Shin

Abstract

One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank's funding cost and its lending growth. In a cross-country bank-level study, we find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a 4 basis point reduction in debt financing and with a 0.6 percentage point increase in annual loan growth.

Suggested Citation

  • Leonardo Gambacorta & Hyun Song Shin, 2016. "Why bank capital matters for monetary policy," BIS Working Papers 558, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:558
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    More about this item

    Keywords

    Bank capital; book equity; monetary transmission mechanisms; funding; bank lending;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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