Bank Capital, Bank Lending, and Monetary Policy in the Euro Area

Bank Capital, Bank Lending, and Monetary Policy in the Euro Area This paper provides arguments and evidence in favour of the hypothesis that bank capital matters for euro area banks' loan response to a change in monetary policy. Bank-level panel data estimates for 1991-1999 show that the lending behaviour of the least-capitalised banks in France and Italy is more responsive to a change in monetary policy than that of better capitalised banks. The degree of capitalisation also matters for the monetary policy impact on lending of the key players in the German and euro area banking system. These findings suggest that the new Basle capital requirements can affect the monetary transmission channel through bank capital. (JEL C23, E52, G21)