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Bank Capital and Lending: An Analysis of Commercial Banks in the United States
G21 - Banks; Other Depository Institutions; Mortgages
G28 - Government Policy and Regulation
G32 - Financing Policy; Capital and Ownership Structure
This paper empirically evaluates the impact of bank capital on lending patterns of commercial banks in the United States. We construct an unbalanced quarterly panel of around seven thousand medium sized commercial banks over sixty quarters, from 1996 to 2010. Using two different measures of capital namely the capital adequacy ratio and tier 1 ratio, we find a moderate relationship between bank equity and lending. We also use an innovative instrumenting methodology which helps us overcome the endogeneity issues that are common in such analyses. Our results are broadly consistent with some other recent studies that have analyzed US banking data.