How Does Post-Crisis Bank Capital Adequacy Affect Firm Investment?

27 Pages Posted: 21 Jul 2015

See all articles by Yangfan Sun

Yangfan Sun

International Monetary Fund (IMF) - Research Department

Hui Tong

International Monetary Fund (IMF)

Date Written: June 2015

Abstract

We examine the effect of bank capital levels on firm investment drawing on a sample of 11,106 non-financial firms from 2007 to 2013 in 16 advanced economies. We examine two measures of bank capital adequacy, the Tier 1 ratio and a simple leverage ratio, and find that firms with larger external financial needs invest relatively more when domestic financial systems have relatively high leverage ratios. This pattern is more pronounced for those firms that have sound fundamentals, suggesting that bank balance sheets and their willingness to extend credit can be an important factor in determining aggregate investment and growth outcomes. The empirical findings are robust to a range of specifications. Bank Tier 1 capital ratio does not appear to have a significant effect on corporate investment, possibly because a higher Tier 1 ratio also captures a high share of assets with low risk weights.

Keywords: Banking sector, Bank capital, Capital adequacy, Corporate sector, Investment, Bank Capital Adequacy, Firm Investment, banks, credit, loans, tier 1 capital, risk, lending, nonperforming loans, finance

JEL Classification: G20, G30

Suggested Citation

Sun, Yangfan and Tong, Hui, How Does Post-Crisis Bank Capital Adequacy Affect Firm Investment? (June 2015). IMF Working Paper No. 15/145. Available at SSRN: https://ssrn.com/abstract=2633931

Yangfan Sun (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Hui Tong

International Monetary Fund (IMF) ( email )

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

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