A few academic papers have recently indicated that banks with a greater amount of capital tend to lend more as a result of lower funding costs. This evidence has been used to support further increases in capital requirements worldwide, including the proposed inclusion of the global systemically important banks (GSIB) capital surcharge in U.S. stress tests. Two recent academic papers supporting the view that higher capital levels lead to an expansion of loan growth are Gambacorta and Shin (2016) and Michelange and Sette (2016). For instance, Gambacorta and Shin (2016) find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a 0.6 percentage point increase in annual loan growth. In this research note we show that the positive relationship between bank capitalization and the growth of lending is driven by the amount of capital in excess of capital requirements, an amount which we refer to as the “capital surplus.”
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