This paper examines whether the effect of bank capital on lending differs depending on the level of bank liquidity. On the basis of the 2003 to 2010 quarterly data of 1,050 US commercial banks, we find that bank capital exerts a significant positive e...
This paper examines whether the effect of bank capital on lending differs depending on the level of bank liquidity. On the basis of the 2003 to 2010 quarterly data of 1,050 US commercial banks, we find that bank capital exerts a significant positive effect on lending when banks retain sufficient liquid assets. This liquidity effect has remained during the recent financial crisis and is more prominent for large banks. The results suggest that bank capital and liquidity are complementary measures for increasing bank lending.