THE EFFECT OF BANK CAPITALIZATION ON LENDING: EVIDENCE FROM BANKS IN ASIA

Abstract

This paper empirically investigates whether and how bank capitalization affects loan growth as well as other balance sheet components that are of regulatory concern, such as growth in risk-weighted assets, regulatory capital, and tier 1 capital. More specifically, this paper strives to conduct the analysis in the context of banks in Asia and over a sample period that overlaps greatly with the Basel III phase-in timeline. The main empirical approach employed is the fixed effects regression with bank-fixed effects; as a robustness check, system generalized method of moments (GMM) is used. The main findings suggest that the capitalization-lending relationship is not a negative one. In addition, banks adjust risk-weighted asset and regulatory capital growth, but not tier 1 capital growth, in response to changes in capitalization. In the wake of these empirical results, several questions pertaining to regulatory policy arise.