The dispersion in the evolution of euro area bank credit has increased substantially over the past decade, largely due to the sovereign crisis and the nexus between the sovereign and the banking system. Given that some measures have been implemented to mitigate this nexus and in a context of recovering bank credit, may bank credit growth dispersion be more related to country factors or to bank characteristics such as the regulatory capital ratio? At the outset, banks with a higher capital ratio are expected to better absorb shocks without affecting their assets, in particular their lending activity. However, empirical studies suggest that the level of capital per se does not appear to be a relevant determinant of bank lending.

The graph shows the annual growth rate of bank loans to euro area non-financial corporations and the median annual rates of change for two groups of banks, depending on whether they lie below or above the median Common Equity Tier 1 capital ratio for the sample of banks considered. For the period under review, there appears to be no significantly different behaviour in loans to non-financial corporations according to this bank variable. Thus, the analysis suggests that there remains a strong link between banks’ vulnerability measures and country factors and that such relationship remains relevant to understanding bank credit developments.

For more details, see Carla Soares, “Euro area credit market: who contributed to the recent recovery?”, published in Banco de Portugal Economic Studies, vol. V, number 3.

Prepared by Carla Soares. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

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