Bank Capital Ratio and Lending Behavior

Using a large panel of data from 3446 banks located in the euro area over the period 2009-2018, this paper aims to shed further light on the question: How does bank capital ratio influence lending behavior? Our results suggest a negative impact of the capital increase on the banks’ loan supply. However, this impact seems to be smaller during the period of implementation of negative interest rates. Moreover, we observe that this effect is influenced by banks’ characteristics, such as size and dependence on deposits. Indeed, we highlight that the reduction in banks’ lending supply was more important for small banks and for those highly dependent on deposits. We complete our analysis by using a theoretical micro-model of bank intermediation. The predictions of the model show that the increase in capital will induce banks to lend less through an increase in the screening of loan applicants and an increase in the cost of credit for those applicants who pass the screening.