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Bank Capitalization and Loan Growth

By Francisco Covas

In this TCH research note we show that the positive relationship between bank capitalization and the growth of lending is driven by the amount of capital in excess of capital requirements, an amount which we refer to as the “capital surplus.” That is, our results show that banks with a higher capital surplus tend to lend more. In contrast, we find that an increase in capital requirements leads to a decrease in loan growth. This note analyzes the impact of changes in capital requirements on bank lending using data covering only the period when Basel I requirements were still in place.

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