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Abstract

We analyze the effect of bank capital on credit cycles for nearly 150 years in Spain. We first build up a thorough measure of bank leverage (i.e. the capital to assets ratio) for the Spanish banking sector starting in the year 1880. Then, we analyze the impact that bank capital levels have on lending cycles, controlling for other determinants of credit growth. We find robust empirical evidence of an asymmetric relationship between bank capital and credit cycles. In particular, an increase in bank capital before expansions reduces credit growth, while it increases credit growth when the recession arrives. Conversely, a too depleted level of bank capital when entering in a recession has a severe impact on lending (i.e. may bring about quite negative and lasting effects in the economy and the wellbeing of the society as a whole). These findings support macroprudential policies (dynamic provisions and the countercyclical capital buffer) that have been very recently put in place, as they will help smooth the credit cycle.