Bank Capital and Lending: An Extended Framework and Evidence of Nonlinearity

43 Pages Posted: 1 Feb 2018

See all articles by Mario Catalán

Mario Catalán

International Monetary Fund (IMF)

Alexander Hoffmaister

International Monetary Fund (IMF)

Cicilia Harun

Bank Indonesia

Date Written: November 2017

Abstract

This paper studies the transmission of bank capital shocks to loan supply in Indonesia. A series of theoretically founded dynamic panel data models are estimated and find nonlinear effects of capital on loan growth: the response of weaker banks to changes in their capital positions is larger than that of stronger banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the financial system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks' starting capital positions and the size of capital injections.

Keywords: Bank capital, Loans, External shocks, Recapitalization, Nonlinearity, Financial crises, Indonesia, Bank capital; Bank lending; Financial shocks; Transmission mechanisms, Bank capital, Bank lending, Financial shocks, Transmission mechanisms, Government Policy and Regulation, Financial Markets and the Macroeconomy

JEL Classification: G01, G21, G28, E32, E44, E51

Suggested Citation

Catalán, Mario and Hoffmaister, Alexander and Harun, Cicilia, Bank Capital and Lending: An Extended Framework and Evidence of Nonlinearity (November 2017). IMF Working Paper No. 17/252, Available at SSRN: https://ssrn.com/abstract=3116209

Mario Catalán (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander Hoffmaister

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Cicilia Harun

Bank Indonesia ( email )

JL. M.H. Thamrin No. 2
Jakarta, 10350
Indonesia

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