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Why bank capital matters for monetary policy

In their paper the authors found that higher bank capital is associated with greater lending, and that the mechanism involved in this channel is the lower funding costs associated with better capitalised banks. The cost advantage of a well-capitalised bank is found to be substantial. A 1 percentage point increase in the equity-to-total-assets ratio is associated with a 4 basis point reduction in the cost of debt financing, they write. The results shed light on the importance of bank capital for the monetary policy mandate of the central bank, as well as to its mandate as the financial supervisor.

BIS working paper No 558
7 April 2016
Source: Bank for International Settlements

Leonardo Gambacorta, BIS
Hyun Song Shin, BIS

>  Why bank capital matters for monetary policy


One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank’s funding cost and its lending growth. In a crosscountry bank-level study, we find that a 1 percentage point increase in the equity-tototal assets ratio is associated with 4 basis point reduction in the cost of debt financing and with a 0.6 percentage point increase in annual loan growth.

Info of the BIS: The views expressed in the paper are those of their authors and not necessarily the views of the BIS.