The effects of capital on bank lending in large EU banks – the role of procyclicality, income smoothing, regulations and supervision

Małgorzata Olszak, Mateusz Pipień, Sylwia Roszkowska () and Iwona Kowalska ()
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Sylwia Roszkowska: Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland
Iwona Kowalska: University of Warsaw, Faculty of Management

No 52014, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: This paper aims to find out what the impact is of bank capital ratios on loan supply in the EU and what factors explain the potential diversity of this impact. Applying the Blundell and Bond (1998) two step GMM estimator, we show that, in the EU context, the role of capital ratio for loan growth is stronger than previous literature has found for other countries. Our study sheds some light on whether procyclicality of loan loss provisions and income smoothing with loan loss provisions contribute to procyclical impact of capital ratio on loan growth. We document that loan growth of banks that have more procyclical loan loss provisions and that engage less in income smoothing is more sensitive to capital ratios. This sensitivity is slightly increased in this sample of banks during contractions. Moreover, more restrictive regulations and more stringent official supervision reduce the magnitude of the effect of capital ratio on bank lending. Taken together, our results suggest that capital ratios are an important determinant of lending in large EU banks.

Keywords: loan supply; capital crunch; procyclicality of loan loss provisions; income smoothing; bank regulation; bank supervision (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:sgm:fmuwwp:52014

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