The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean?

CAMA Working Paper Series 26/2010

50 Pages Posted: 4 Sep 2010 Last revised: 8 Dec 2016

See all articles by Jose M. Berrospide

Jose M. Berrospide

Board of Governors of the Federal Reserve System

Rochelle M. Edge

Monetary Affairs Division at the Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2010

Abstract

The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel-regression techniques - following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994) - to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan’s (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial-bank assets and leverage growth, which have recently been very influential in shaping forecasters’ and policymakers’ views regarding the effects of bank capital on loan growth. Our estimated models are then used to understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.

Suggested Citation

Berrospide, Jose M. and Edge, Rochelle M., The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean? (August 17, 2010). CAMA Working Paper Series 26/2010. Available at SSRN: https://ssrn.com/abstract=1670506 or http://dx.doi.org/10.2139/ssrn.1670506

Jose M. Berrospide (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-3590 (Phone)

Rochelle M. Edge

Monetary Affairs Division at the Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
(202) 452 2339 (Phone)
(202) 736-5638 (Fax)

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