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

By Mario Catalan, Alexander W. Hoffmaister, Cicilia Anggadewi Harun

November 16, 2017

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Mario Catalan, Alexander W. Hoffmaister, and Cicilia Anggadewi Harun. Bank Capital and Lending: An Extended Framework and Evidence of Nonlinearity, (USA: International Monetary Fund, 2017) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: 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

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/252
Stock No:

WPIEA2017252
ISBN:

9781484325995
ISSN:

1018-5941

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