Does Bank Capital Affect the Supply of Credit Lines?

This paper examines whether a bank’s equity capital affects the magnitude of credit lines that banks provide as liquidity insurance for borrowers. Using a panel dataset of commercial banks in 24 OECD countries, we found a positive relationship between capital and the supply of credit lines. This result implies that well-capitalized banks provide more credit lines due to their high risk-bearing capacity. That is, capital as a buffer helps banks to absorb the risk against shocks, thereby leads banks to supply more credit lines. Furthermore, this positive effect of capital on the supply of credit lines is more pronounced during financial crises, wherein the probability of bank failure increases significantly. This suggests that capital as a buffer is more valuable during times of market stress. We also found that riskier banks due to high credit risk or high liquidity risk provide more lines of credit as they become better capitalized, whereas large banks and banks with high wholesale funding ratios reduce their supply of credit lines as their equity ratios increase.