This paper empirically evaluates the impact of bank capital on lending patterns of commercial banks in the United States. We construct an unbalanced quarterly panel of around seven thousand medium sized commercial banks over sixty quarters, from 1996 to 2010. Using two different measures of capital namely the capital adequacy ratio and tier 1 ratio, we find a moderate relationship between bank equity and lending. We also use an innovative instrumenting methodolgy which helps us overcome the endogeneity issues that are common in such analyses. Our results are broadly consistent with some other recent studies that have analyzed US banking data.JEL Codes: G21, G28, G32

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This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank's financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.JEL Codes: G01, G21, G28

Financial depth in Sub-Saharan Africa (SSA) has been uneven over the last two decades. The WAEMU countries are lagging behind other regions, particularly the High Growth Non-oil Exporters (HGNOEs) group. We use two complementary methodologies to compare the two groups of countries. In a panel of 16 countries over 1997-2009, we find that the financial gap between the two groups of countries can be explained by institutional factors. In a benchmarking exercise comparing the major economy in the WAEMU (Côte d'Ivoire) with the most structurally similar in the control group (Mozambique), we show that Côte d'Ivoire underperformed relative to Mozambique and to its estimated potential. We then identify policy and institutional asymmetries between the two countries that could explain the gap in performance.

How severe are the real consequences of financial distress caused by sovereign debt crisis? What are the channels through which sovereign debt crisis affect banks and firms, and vice versa? Does firm heterogeneity matter? If yes, what are the important dimensions of heterogeneity? Using micro data from Portugal during the sovereign crisis starting in 2010, we address these questions. We make use of the Bank of Portugal's detailed credit registry database together with bank and firm balance sheets and income statements to conduct this analysis. We first study the direct effect of the sovereign crisis on bank balance sheets by analyzing the differential impact on firms that had relations with banks who were more exposed to the sovereign (pre-crisis). We find that more fragile firms that had relations with more exposed banks contracted more than their counterparts. Specifically we find leverage and maturity structure of debt to be important dimensions of heterogeneity determining a firm's fragility. Highly leveraged firms and those that had a larger share of short term debt contracted more during the sovereign debt crisis. We analyze firm performance on the basis of growth rate of employment, assets, liabilities and usage of intermediate commodities. We show that our findings are consistent with a simple model of leverage and maturity choice. We then document the spillover effects across firms that are mediated through the banking sector. To do this, we focus on the set of firms that were current on all their loans through the crisis, i.e., the set of performing firms. We find that performing firms that had relations with banks whose corporate loan balance sheet deteriorate by more were more affected by the sovereign crisis. Again, highly leveraged firms and those that had a larger share of short term debt contracted more during the sovereign debt crisis.