EconPapers    
Economics at your fingertips  
 

Bank capital, lending booms, and busts: Evidence from Spain over the last 150 years

Mikel Bedayo, Angel Estrada () and Jesús Saurina

Latin American Journal of Central Banking (previously Monetaria), 2020, vol. 1, issue 1

Abstract: In this paper, we analyze the role bank capital played in systemic banking crises and in lending expansion and contraction for nearly 150 years in Spain. We first build a measure of capital ratio (i.e., the capital to assets ratio) for Spain's banking sector, starting in 1880. Then, we analyze if more capital reduces the probability of a banking crisis using a narrative identification of banking crises in Spain. Afterwards, we run a proper econometric test to analyze bank capital levels’ impact on lending cycles, controlling for other determinants of credit growth. We find robust empirical evidence that higher levels of capital reduce the probability of a crisis and that increasing the bank capital before loan expansions reduces credit growth and reduces the credit's decline if a systemic crisis materializes. Conversely, overly depleted bank capital when entering a credit contraction period severely impacts lending (i.e., may bring about a deep credit crunch), with negative and lasting effects on the economy and on society's wellbeing as a whole. The paper is particularly useful for supporting the credit cycle smoothing role of recently implemented macroprudential policies (countercyclical capital buffer).

Keywords: Lending cycles; Bank crisis; Capital ratio; Leverage ratio; Macroprudential tools (search for similar items in EconPapers)
JEL-codes: G01 G21 N23 N24 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S266614382030003X
Gold Open Access

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:lajcba:v:1:y:2020:i:1:s266614382030003x

DOI: 10.1016/j.latcb.2020.100003

Access Statistics for this article

Latin American Journal of Central Banking (previously Monetaria) is currently edited by Manuel Ramos-Francia

More articles in Latin American Journal of Central Banking (previously Monetaria) from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-12-08
Handle: RePEc:eee:lajcba:v:1:y:2020:i:1:s266614382030003x