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

Mario Catalan, Alexander Hoffmaister and Cicilia Harun

No 2017/252, IMF Working Papers from International Monetary Fund

Abstract: This 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. Likewise, the effects of bank recapitalization on loan growth depend on banks’ starting capital positions and the size of capital injections.

Keywords: WP; capital ratio; growth rate; Bank capital; Bank lending; Financial shocks; Transmission mechanisms; loan growth; impulse response; capital shock; optimization problem; macroeconomic variable; profit-maximizing behavior; bank capital-lending nexus; bank capital heterogeneity; bank depositor; Loans; Capital adequacy requirements; Bank credit; Central bank policy rate; Estimation techniques; Global (search for similar items in EconPapers)
Pages: 42
Date: 2017-11-16
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Citations: View citations in EconPapers (5)

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