Do financial sector structure and development matter for the effect of bank capital on lending in large EU banks?
Do financial sector structure and development matter for the effect of bank capital on lending in large EU banks?

Summary/Abstract: The paper aims at finding out what is the impact of bank capital ratios on loan supply in the EU and what factors explain the potential diversity of this impact. Applying the Blundell and Bond (1998) two step GMM estimator, we find that in the full sample of large banks the role of capital ratio on loan growth in contractions is relatively weak. However, if we take into account the differences in financial sector structure and development between EU countries, we find that the effect of capital ratio on lending is positive and statistically significant. Therefore, our results suggest that capital ratios are an important determinant of lending in the large EU banks in those countries where financial sector is more dominated by stock markets of is better developed. Thus, our results provide support for the view that more financially developed economies are prone to greater procyclical impact of capital ratios on lending of banks.

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