A changing effect of bank capital on lending in response to the level of liquidity: Evidence from US commercial banks from 2003 to 2010
- A changing effect of bank capital on lending in response to the level of liquidity: Evidence from US commercial banks from 2003 to 2010
- KIM, DOHAN
- Issue Date
- KDI School of public policy and management
- This paper examines whether the effect of a change of bank capital ratios on lending differs depending on the level of liquidity. Using the balanced 1,050 U.S. commercial
banks quarterly data from 2003 Q1 to 2010 Q4, this paper finds that the effect of bank capital on credit growth, where it is defined as a quarterly growth rate of loans and unused commitments, relates positively to the level of bank liquid assets. It also shows that the
positive effect of bank capital increase on credit growth is significant only after banks retain enough liquid assets. This interaction effect did not change during the recent financial crisis period, and were more prominent for large banks. The results suggest three important policy implications. First, any policy actions to sustain bank lending, for example capital injections
and liquidity support, are complementary and should be implemented harmoniously to be more effective. Second, if only capital injection is implemented, this would be more effective for banks with high liquid assets in the light of boosting credit supply. At last, international regulatory efforts to induce banks to hold more liquid assets and capital would be a right direction since banks with more liquid assets and capital would be able to supply more credit thanks to their increased capability of absorbing negative economic shocks.
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