IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v37y2019i3p372-388.html
   My bibliography  Save this article

The bank capital channel and bank profits

Author

Listed:
  • Paul E. Orzechowski

Abstract

This paper develops a microeconomic model of banking to highlight an endogenous loan creation process that emerges from bank profits via the capital accumulation of retained earnings and uses a simple bank capital‐loan multiplier to illustrate constraints on lending. The study also analyzes how sufficient net interest margins are important for banks to maintain lending portfolios and avoid financial fragility. The model offers support to bank capital channel (BKC) economists by illustrating how changes in interest rates may influence bank lending through the bank's internal capital accumulation growth rate and on a bank's portfolio choices.

Suggested Citation

  • Paul E. Orzechowski, 2019. "The bank capital channel and bank profits," Review of Financial Economics, John Wiley & Sons, vol. 37(3), pages 372-388, July.
    • Handle: RePEc:wly:revfec:v:37:y:2019:i:3:p:372-388
    DOI: 10.1002/rfe.1054
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/rfe.1054
    Download Restriction: no
    File URL: https://libkey.io/10.1002/rfe.1054?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
    2. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
    3. Hugonnier, Julien & Morellec, Erwan, 2017. "Bank capital, liquid reserves, and insolvency risk," Journal of Financial Economics, Elsevier, vol. 125(2), pages 266-285.
    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    6. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
    7. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    8. Thakor, Anjan V, 1996. "Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 51(1), pages 279-324, March.
    9. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    10. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
    11. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    12. Benjamin Cohen, 2013. "How have banks adjusted to higher capital requirements?," BIS Quarterly Review, Bank for International Settlements, September.
    13. Kishan, Ruby P. & Opiela, Timothy P., 2006. "Bank capital and loan asymmetry in the transmission of monetary policy," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 259-285, January.
    14. Gambacorta, Leonardo & Shin, Hyun Song, 2018. "Why bank capital matters for monetary policy," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 17-29.
    15. Chami, Ralph & Cosimano, Thomas F., 2010. "Monetary policy with a touch of Basel," Journal of Economics and Business, Elsevier, vol. 62(3), pages 161-175, May.
    16. Claudio Borio & Leonardo Gambacorta & Boris Hofmann, 2017. "The influence of monetary policy on bank profitability," International Finance, Wiley Blackwell, vol. 20(1), pages 48-63, March.
    17. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    18. Allen, Linda, 1988. "The Determinants of Bank Interest Margins: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 231-235, June.
    19. Craig Furfine, 2001. "Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(1), pages 33-56, September.
    20. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-638, August.
    21. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    22. David Andolfatto & Ed Nosal, 2001. "A simple model of money and banking," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 20-28.
    23. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    24. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    25. Carlson, Mark & Shan, Hui & Warusawitharana, Missaka, 2013. "Capital ratios and bank lending: A matched bank approach," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 663-687.
    26. Cornett, Marcia Millon & Tehranian, Hassan, 1994. "An examination of voluntary versus involuntary security issuances by commercial banks *1: The impact of capital regulations on common stock returns," Journal of Financial Economics, Elsevier, vol. 35(1), pages 99-122, February.
    27. Aliaga-Díaz, Roger & Olivero, María Pía, 2012. "Do Bank Capital Requirements Amplify Business Cycles? Bridging The Gap Between Theory And Empirics," Macroeconomic Dynamics, Cambridge University Press, vol. 16(3), pages 358-395, June.
    28. repec:bla:scandj:v:84:y:1982:i:4:p:495-530 is not listed on IDEAS
    29. Basil J. Moore, 1989. "A Simple Model of Bank Intermediation," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 12(1), pages 10-28, September.
    30. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-844, December.
    31. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
    32. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
    33. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    34. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
    35. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
    36. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, April.
    37. James R. Barth, 1991. "The Great Savings and Loan Debacle," Books, American Enterprise Institute, number 918256, September.
    38. Oliner, Stephen D & Rudebusch, Glenn D, 1992. "Sources of the Financing Hierarchy for Business Investment," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 643-654, November.
    39. R. Alton Gilbert, 1986. "Requiem for Regulation Q: what it did and why it passed away," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 22-37.
    40. Werner, Richard A., 2016. "A lost century in economics: Three theories of banking and the conclusive evidence," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 361-379.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    2. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
    3. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    4. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
    5. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    6. Hitoshi Inoue, 2010. "Capital Adequacy Requirements And The Financial Accelerator Caused By Bank Capital," The Japanese Economic Review, Japanese Economic Association, vol. 61(3), pages 382-407, September.
    7. Jorge, José, 2009. "Why do bank loans react with a delay to shifts in interest rates? A bank capital explanation," Economic Modelling, Elsevier, vol. 26(5), pages 799-806, September.
    8. Paul E. Orzechowski, 2017. "Bank capital, loan activity, and monetary policy: evidence from the FDIC’s Historical Statistics on Banking," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(2), pages 392-407, April.
    9. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    10. Kok, Christoffer & Gross, Marco & Żochowski, Dawid, 2016. "The impact of bank capital on economic activity - evidence from a mixed-cross-section GVAR model," Working Paper Series 1888, European Central Bank.
    11. Jiménez, Gabriel & Ongena, Steven & Peydró, José-Luis & Saurina, Jesús, 2010. "Credit supply - Identifying balance-sheet channels with loan applications and granted loans," Working Paper Series 1179, European Central Bank.
    12. Levintal, Oren, 2013. "The real effects of banking shocks: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 556-578.
    13. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    14. Nada Mora & Andrew Logan, 2012. "Shocks to bank capital: evidence from UK banks at home and away," Applied Economics, Taylor & Francis Journals, vol. 44(9), pages 1103-1119, March.
    15. Haifang Huang & Eric Stephens, 2015. "From housing bust to credit crunch: Evidence from small business loans," Canadian Journal of Economics, Canadian Economics Association, vol. 48(3), pages 853-880, August.
    16. Cappelletti, Giuseppe & Reghezza, Alessio & Rodriguez d’Acri, Costanza & Spaggiari, Martina, 2020. "Compositional effects of O-SII capital buffers and the role of monetary policy," Working Paper Series 2440, European Central Bank.
    17. David VanHoose, 2006. "Bank Behavior Under Capital Regulation: What Does The Academic Literature Tell Us?," NFI Working Papers 2006-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    18. Leonardo Gambacorta & Paolo Emilio Mistrulli, 2003. "Bank Capital and Lending Behaviour: Empirical Evidence for Italy," Temi di discussione (Economic working papers) 486, Bank of Italy, Economic Research and International Relations Area.
    19. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    20. Paul Mizen & Cihan Yalcin, 2006. "Monetary Policy, Corporate Financial Composition and Real Activity," CESifo Economic Studies, CESifo Group, vol. 52(1), pages 177-213, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:37:y:2019:i:3:p:372-388. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.