HOW DOES BANK CAPITAL INFLUENCE LENDING AND SECURITIES HOLDINGS? EVIDENCE FROM ASIAN BANKS

Abstract

Using panel dataset of 370 banks from 15 Asian countries over the period 2010-2018, this paper provides empirical evidence on the impact of bank capital on lending, and securities holdings. Our findings suggest that the increase in bank capital reduces lending supply, especially lending with a maturity between 1 and 5 years. Moreover, we highlight that the incentives to hold more securities (such as investment and trading securities) increase as banks’ capital increases. We also show that the banks that responded most were highly deposit-dependent and small. Overall, our results suggest that Asian banks respond to a capital increase by decreasing the supply of loans against an increase in securities holding.