Working Paper

The Effect of Banks' Financial Position on Credit Growth : Evidence from OECD Countries


Abstract: This paper presents empirical evidence on the effect of banks' financial position on credit growth using a sample of 29 OECD countries. The failure of the exogeneity assumption of explanatory variables is addressed using dynamic panel type instruments. The empirical results show that among capital, profits and liquidity at the end of the previous year, capital is the most important predictor of credit growth in the current year. The relationship between capital and credit growth is non-linear. Point estimates from the preferred econometric specification imply that at the sample mean a one standard deviation increase (decrease) in capital is associated with an increase (decrease) of 0.8 (0.3) percentage points in credit growth upon impact and 1.6 (0.6) percentage points in the long-run.

Keywords: Bank lending; Banking; Bank financial position; Credit supply; OECD;

JEL Classification: G21; E44; G28;

https://doi.org/10.17016/FEDS.2016.101

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Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2016-09-19

Number: 2016-101