Series: Working Papers. 1847.
Author: Mikel Bedayo, Ángel Estrada and Jesús Saurina.
Published in: Latin American Journal of Central Banking
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Abstract
In this paper we analyze the effect of bank capital on lending expansion and contraction for
nearly 150 years in Spain. We first build up thoroughly a measure of bank leverage (i.e. the
capital to assets ratio) for the Spanish banking sector starting in year 1880. Then, we run
a proper econometric test to analyze the impact that bank capital levels have on lending
cycles, controlling for other determinants of credit growth. We do find robust empirical
evidence of an asymmetric relationship between bank capital and credit cycle. In particular,
an increase in the 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 a deep
credit crunch) with quite negative and lasting effects in the economy and the wellbeing of
the society as a whole. The paper is particularly useful to support macroprudential policies
(dynamic provisions and the countercyclical capital buffer) that have been very recently put
in place as they will help to smooth the credit cycle. The experience of Spain over more
than a century, with very marked lending cycles, provides a fertile ground for analyzing and
supporting them, not only based on the last lending cycle, but also on those occurred in
the more distant past.