Bank Capital and Lending: An Extended Framework and Evidence of Nonlinearity

Abstract

This paper studies the transmission of bank capital shocks to loan supply in Indonesia. A series of theoretically founded dynamic panel data models are estimated and find nonlinear effects of capital on loan growth: the response of weaker banks to changes in their capital positions is larger than that of stronger banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the financial system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks' starting capital positions and the size of capital injections.

Capital regulation and bank balance sheet adjustments: a simultaneous approach

“…In addition, banks with low capital ratios () will focus more on investments and other asset adjustments, and have lower adjustments in loans, as suggested by Haubrich and Wachtel () and Catalan et al . (). This provides evidence of a capital crunch in Asia.…”

“…The increase in government securities and decrease in commercial and industrial loans are lessened as the bank's capital position improves (Haubrich and Wachtel, ). In addition, reduction in bank lending is greater for banks with a weaker capital position (Catalan et al ., ) and varies across different sectors of the economy (Bridges et al ., ).…”

“…After the 2008 global financial crisis, Japanese banks, along with other banks in advanced economies, reduced both assets and lending and accumulated capital through reducing dividend payments (Cohen and Scatigna, ). In contrast, Indonesian banks reduced their lending, depending on the initial capital position (Catalan et al ., ). However, during 2009–2012, large banks in emerging Asian countries raised both their assets and lending, and strengthened their capital base through higher profits (Cohen and Scatigna, ).…”

Measuring the restrictiveness of (macro)prudential policy: the case of bank capital regulation in Poland

“…More recently, several studies, including i.a. Gambacorta and Shin [32], Borio and Gambacorta [13], Catalán et al [19], Kapuściński [39], and Deutsche Bundesbank [26] utilised difference between banks' CAR and regulatory capital requirements as an explanatory factor in bank lending models. Gambacorta and Shin [32] defined the "free bank capital" as capital in excess of minimum capital requirements.…”

“…Borio and Gambacorta [13] labelled the difference between the regulatory capital ratio and the regulatory minimum as "banks regulatory capital buffer". Catalán et al [19] introduced the name "capital ratio distance" with the exact same definition. Kapuściński [39] called it, simply, the "capital buffer", whilst Deutsche Bundesbank [26] used the name "excess capital buffer".…”