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

IMF Working Papers, November 16, 2017

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

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Bibliographic details

• Authors: Mario Catalan, Alexander W. Hoffmaister, Cicilia Anggadewi Harun
• Published: November 16, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484325995.001

Overview

• Authors: Mario Catalan, Alexander W. Hoffmaister, Cicilia Anggadewi Harun
• Publication date: November 16, 2017
• Abstract summary:
  • The 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.
  • The effects of bank recapitalization on loan growth depend on banks’ starting capital positions and the size of capital injections.

Key findings

• Nonlinear capital-lending relationship:
  • The response of weaker banks to changes in their capital positions is larger than that of stronger banks.
  • Distribution of capital across banks matters for transmission of shocks to aggregate lending.
• Recapitalization effects:
  • Effects of bank recapitalization on loan growth depend on banks’ starting capital positions and the size of capital injections.
• Empirical setting:
  • Country studied: Indonesia

Methodology and Analysis

• Model approach:
  • A series of theoretically founded dynamic panel data models are estimated.
• Econometric focus and concepts:
  • Estimation techniques, dynamic panel data, impulse response, nonlinear effects.
  • Transmission mechanisms analyzed in the context of profit-maximizing behavior and optimization problems.

Policy implications and interpretation

• Regulatory and supervisory relevance:
  • Both the level of bank capital and its distribution across banks influence aggregate lending responses to capital shocks.
• Recapitalization design:
  • Policymakers should consider banks’ starting capital positions and the size of capital injections when assessing likely effects on loan growth.

Subjects and keywords (as provided)

• Subjects: Bank credit; Banking; Capital adequacy requirements; Central bank policy rate; Econometric analysis; Estimation techniques; Financial institutions; Financial regulation and supervision; Financial services; Loans; Money
• Keywords: Bank capital; bank capital heterogeneity; bank capital-lending nexus; Bank credit; bank depositor; Bank lending; Capital adequacy requirements; capital ratio; capital shock; Central bank policy rate; Estimation techniques; Financial shocks; Global; growth rate; impulse response; loan growth; Loans; macroeconomic variable; optimization problem; profit-maximizing behavior; Transmission mechanisms; WP