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

_IMF Working Papers, November 16, 2017_

## Source details

**Canonical URL:** [Bank Capital and Lending: An Extended Framework and Evidence of Nonlinearity](https://www.imf.org/en/publications/wp/issues/2017/11/16/bank-capital-and-lending-an-extended-framework-and-evidence-of-nonlinearity-45376)

## Other formats

- [Markdown version](/en/publications/wp/issues/2017/11/16/bank-capital-and-lending-an-extended-framework-and-evidence-of-nonlinearity-45376/index.md)
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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

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### 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

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_Source: https://www.imf.org/en/publications/wp/issues/2017/11/16/bank-capital-and-lending-an-extended-framework-and-evidence-of-nonlinearity-45376_