Does Bank Capital Matter for Corporate Borrowers ? Evidence from France

Using a large matched bank-firm database containing information on 83,900 French firms and 159 European banks for the period 2014–2016, we show that bank capital affects the type of lending relationships and firms' access to credit even during a phase of economic expansion. Informationally opaque borrowers are more likely to borrow from banks with relatively high levels of capital—on average, SMEs tend to borrow from banks that have 1.3 percentage points higher equity capital ratio with respect to banks that lend to larger firms. In turn, this endogenous matching has positive effects on credit conditions: a one-standard-deviation increase in bank capital ratio is associated to half a percentage point decrease in borrowing costs for the average firm. Firms related to high capital banks also obtain larger shares of short-term loans and long-term debt, and are less dependent on trade credit from suppliers. These results suggest that high capital banks and informationally opaque borrowers are naturally predisposed to match, and that these banks are able to pass down their lower funding costs to their customers in the form of greater availability of credit at a lower price.