An Empirical Analysis of Bank Capital and Capital Requirements' impact on Lending: Evidence from Scandinavia in the Period 2013 to 2016

Anders Skindhøj & Nicolai Kjær Jacobsen

Student thesis: Master thesis

Abstract

The effect of bank capital and capital requirements on bank lending is a key determinant of the linkage between the financial conditions of the banking sector and real activity in the economy through credit supply. Quantifying the relationship has therefore been subject to increasing attention from researchers in trajectory with the general increase in capital requirements in the past decades. We estimate a panel data regression on a sample of 137 Scandinavian banks be- tween 2013-2016 to test the effect of bank capital and Basel III capital requirements on bank lending. The empirical study’s research design is informed by theoretical insights from the ‘bank capital channel’ literature. The thesis adds to the discussion in the academic literature on capi- tal requirements on lending by considering the recent implementation of Basel III requirements, which has not yet been studied. Our results can be summarised as follows. First, we find that an increase in the equity-to-assets ratio leads to a modest increase in lend- ing growth. We thus confirm the findings of previous empirical studies like Berrospide & Edge (2010). Secondly, in contrast to other empirical studies, we find no evidence of a direct significant relationship between capital requirements and lending growth. Neither, do we find evidence of a relationship between excess capital held above capital requirements and bank lending. Further, we some find evidence that under-capitalised banks are associated with significant lower lending growth compared to adequately capitalised banks. Finally, evidence is found that that lending behaviour of listed banks is less negatively affected by an increase in capital ratios compared to non-listed banks. Some evidence is also found in support of differences in lending behaviour across bank size but not across the three Scandinavian countries, Denmark, Sweden and Norway.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages135