The effect of capital empowerment on the lending competence of banks: Evidence from segmental analysis

This paper investigates how bank capital affects the lending behavior, and whether this relationship varies with bank size. We examine a large sample of US bank holding companies and we document consistent evidence that well-capitalized banks are more likely to increase loan growth, especially with real estate loans, commercial and industrial loans and loans for individuals. However, this positive effect is not uniform across bank sizes. In particular, during the crisis, medium and large banks do not show this positive effect, while small banks do. Besides, our study contributes to the understanding of the impacts of capital on bank lending after the crisis, as we document one of the first pieces of evidence indicating the absence of a relationship between lending and capital for banks of all sizes during this period. Our results are of interest to regulators and policymakers when implementing policy actions and regulations regarding bank size, especially during uncertainty times. For instance, policymakers can use this information to design and implement policies that promote capital adequacy in the banking sector, which can contribute to a more robust and stable lending environment.