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

By J. Berrospide, Rochelle M. Edge. 2012

391 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/d06fc0652222a33bbf733346c2cedb6411f72716

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Citations in the corpus

The unreliability of credit-to-GDP ratio gaps in real-time: Implications for countercyclical capital buffers (2011, positive): “50; more recently, Berrospide and Edge (2010) estimate the effect of bank capital on lending using bank holding company data and confirm the modest effects of Hancock and Wilcox.”
Did the EBA Capital Exercise Cause a Credit Crunch in the Euro Area (2014, neutral): “…varied degree of granularity of the data used, are Aiyar, Calomiris, and Wieladek (2014), Albertazzi and Marchetti (2010), Basset and Covas (2012), Berrospide and Edge (2010), Bridges et al. (2014), Brun, Fraisse, and Thesmar (2014), Francis and Osborne (2009), Maurin and Toivanen (2012), and…”
Bank Behavior in Response to Basel III: A Cross-Country Analysis (2011, methodology): “This convex property predicted by the call option view of bank capital distinguishes this model from the partial adjustment model of bank capital estimated by Flannery and Rangan (2008), Berrospide and Edge (2010), Francis and Osborne (2009).”
Shadow Banks and Macroeconomic Instability (2017, neutral): “The finding of counter-cyclical (credit) or acyclical (total assets) broker-dealer leverage in table D.3 should be compared to the analysis of Adrian and Shin (2010), and Berrospide and Edge (2010).”
Do Credit Market Shocks Affect the Real Economy? Quasi-experimental Evidence from the Great Recession and “Normal” Economic Times (2020, neutral): “6 See also Huang and Stephens (2014), Berrospide and Edge (2010), Gozzi and Goetz (2010), and Almeida et al. (2012).”
Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support (2011, neutral): “Financial crises raise the question of how effectively banks can be disciplined in episodes of extraordinary distress and what the impact is of capital support during such times (Berrospide and Edge (2010); Giannetti and Simonov (2010)).”
Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions (2015, neutral): “They find that TARP banks provide more small business loan originations than non-TARP banks.6 Berrospide and Edge (2010), Chavaz and Rose (2017), and Chu, Zhang, and Zhao (2017) also find that TARP banks expanded their quantities of credit.”
Balance Sheet Strength and Bank Lending During the Global Financial Crisis (2013, neutral): “9 In a related study, Berrospide and Edge (2010) focus on bank holding companies and find a small impact of changes in capital on lending; however, they do not distinguish between tranquil and crisis times.”
In Search for Yield? Survey-Based Evidence on Bank Risk Taking (2014, background): “Berrospide and Edge (2010), for instance, assume that banking variables can react contemporaneously to innovations in the Federal Funds rate.”
Bank Liquidity Creation and Real Economic Output (2017, neutral): “Studies of other time perids and other nations seem to confirm these results, although the ffects are often smaller (e.g., Peek and Rosengren, 20 0 0; Calomiris nd Wilson, 2004; Driscoll, 2004 ; Francis and Osborne, 2012 ; errospide and Edge, 2010; Aiyar et al., 2012; Jiménez et al., 2013 ).”