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Bank Capital Ratio and Lending Behavior

Author

Listed:
  • Emmanuelle Augeraud-Véron
  • Whelsy Boungou

    (PSB - Paris School of Business, France)

Abstract

Using a large panel of data from 3446 banks located in the euro area over the period 2009-2018, this paper aims to shed further light on the question: How does bank capital ratio influence lending behavior? Our results suggest a negative impact of the capital increase on the banks’ loan supply. However, this impact seems to be smaller during the period of implementation of negative interest rates. Moreover, we observe that this effect is influenced by banks’ characteristics, such as size and dependence on deposits. Indeed, we highlight that the reduction in banks’ lending supply was more important for small banks and for those highly dependent on deposits. We complete our analysis by using a theoretical micro-model of bank intermediation. The predictions of the model show that the increase in capital will induce banks to lend less through an increase in the screening of loan applicants and an increase in the cost of credit for those applicants who pass the screening.

Suggested Citation

  • Emmanuelle Augeraud-Véron & Whelsy Boungou, 2023. "Bank Capital Ratio and Lending Behavior," Review of Development Finance Journal, Chartered Institute of Development Finance, vol. 13(2), pages 1-20.
    • Handle: RePEc:afj:journ3:v:13:y:2023:i:2:p:1-20
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    File URL: https://journals.co.za/doi/abs/10.10520/ejc-rdfin_v13_n2_a1
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    More about this item

    Keywords

    Bank capital ratio; lending behavior; bank business model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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