Journal of Banking and Finance 92 (2018) 35–50

Contents lists available at ScienceDirect

Journal of Banking and Finance

journal homepage: www.elsevier.com/locate/jbf

Balance sheet strength and bank lending: Evidence from the global
financial crisis
Tümer Kapan a, Camelia Minoiu b,∗
a
International Monetary Fund, United States
b
International Monetary Fund, Wharton School, University of Pennsylvania, 3601 Market St. Unit 1207, Philadelphia, PA 19104, United States

a r t i c l e i n f o a b s t r a c t

Article history: We use the 20 07-20 08 financial crisis as a lens to study the link between banks’ financial health and the
Received 6 April 2017 strength of transmission of financial sector shocks to the real economy. We find that banks with ex-ante
Accepted 14 April 2018
stronger balance sheets, in particular higher levels of common equity, were better able to maintain credit
Available online 25 April 2018
supply when faced with liquidity shocks during the crisis. Bank recapitalizations mitigated the lending
JEL classification: gap between high and low capital banks, but only in countries with strong sovereigns. These findings
G21 support the view that strong financial intermediary balance sheets are key for the recovery of credit and
G18 economic performance after large financial sector shocks.
G01
© 2018 Elsevier B.V. All rights reserved.
Keywords:
International shock transmission
Bank lending channel
Wholesale funding
High-quality capital
Basel III

1. Introduction hibitive levels, creating an unexpected liquidity shock. We inves-

In recent years central banks and regulatory agencies have
stepped up efforts to enhance supervisory regimes and to im-
prove the health of financial intermediaries. These efforts rest on
the assumption that strong bank balance sheets, through higher
capital and liquidity, make banking systems more resilient to ad-
verse shocks and less likely to transmit them to the real econ-
omy through reduced credit. The 20 07–20 08 financial crisis fo-
cused attention on the vital role of bank capital in understand-
ing financial stability, as emphasized, for instance, by Hyun Song
Shin, Head of Research at the Bank for International Settlements
(BIS). He argues that “capital serves as the banks’ foundation for
lending for the real economy” and that “bank capitalization ought
to be a key concern for central banks in fulfilling their mone-
tary policy mandate, as well as their financial stability mandate”
(Shin, 2016).
In this paper, we examine the importance of bank balance
sheet strength, in particular that of capital, for credit supply and
real economic activity following a large financial shock. We do
so through the lens of the 20 07–20 08 financial crisis, when the
cost of market funding for financial institutions increased to pro-
∗
Corresponding author.
E-mail addresses: tkapan@imf.org (T. Kapan), cminoiu@imf.org (C. Minoiu).
tigate how banks’ exposure to this shock influenced their sub-
sequent lending behavior, and how it interacted with the level
and quality of bank capital. By quantifying the link between
bank financial health, credit supply, and real economic activ-
ity, we bring systematic evidence to the literature on the role
of bank capital in the transmission of shocks to the real econ-
omy and the discussion on bank capital regulation (see, e.g.,
Admati (2016); Dagher et al. (2016); Acharya et al. (2015)).
Our analysis reveals that there is substantial variation in banks’
ability to sustain lending in the wake of financial shocks, and that
this ability is determined by the strength of their balance sheets.
We have three main results. First, we find that banks that relied
more on market-based funding, and hence were more vulnerable
to liquidity shocks during the 20 07–20 08 crisis, subsequently re-
duced the supply of credit more than other banks, both on the
intensive and extensive margins. Second, this effect depended on
both the quantity and quality of bank capital. Banks that held more
tangible common equity (TCE), either in absolute terms or in ex-
cess of the regulatory standard, reduced lending less than other
banks with similar exposure to shocks. Third, government assis-
tance programs in the form of capital injections reduced the abil-
ity of pre-crisis capital to sort banks according to their lending ca-
pacity during the crisis, but only in countries with low sovereign
default risk.

https://doi.org/10.1016/j.jbankfin.2018.04.011
0378-4266/© 2018 Elsevier B.V. All rights reserved.
36 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50
Fig. 1. Three-month dollar LIBOR–OIS spread.
This chart shows the monthly average of the three-month dollar London Interbank
Offered Rate-Overnight Indexed Swap (LIBOR–OIS) spread during Jan 2006-Dec 2010
(in basis points). The pre-crisis period runs from Jan 2006 to Jun 2007 and the
global financial crisis period runs from Oct 2008 to Mar 2010. The build-up phase
of the crisis (Jul 2007 to Sep 2008) refers to the period when the U.S. subprime
crisis started and intensified. The global phase of the crisis (Oct 2008–Mar 2010)
refers to the period during which the U.S. subprime crisis turned into a full-fledged
global financial crisis after the collapse of US investment bank Lehman Brothers. In
the baseline analysis we drop the loans extended during the build-up phase and
compare the change in lending between the pre-crisis and global stage of the crisis
as a function of pre-crisis bank balance sheet strength. Data sources: Bloomberg.
To perform the analysis, we use micro-data on corporate loans
extended by a large sample of banks to firms across the world.
Most loans come from the syndicated loan market, a wholesale
loan market for corporations and sovereigns.1 We analyze the
lending behavior of more than 800 banks vis-à-vis borrowers from
48 advanced economies and emerging markets during 2006–2010.
Studying the global supply of loans requires careful sample period
selection. To relate loan growth to bank balance sheet strength,
we first partition the sample period into a pre-crisis and a cri-
sis period. The pre-crisis period runs from 2006 until the earli-
est signs of financial distress in the summer of 2007 (2006Q1-
2007Q2). We then split the crisis period into an early-stage or
build-up phase that runs from mid-2007 until the collapse of
Lehman Brothers (20 07Q3-20 08Q3) and a later stage when the cri-
sis reached a global scale (2008Q4-2010Q1). We illustrate these
periods in Fig. 1 and we superimpose the London Interbank Of-
fered Rate-Overnight Indexed Swap (LIBOR-OIS) spread, which re-
flects substantially tighter bank funding conditions during the cri-
sis period.
Our focus is on the global stage of the crisis, which we call
the “global financial crisis.” For our baseline analysis we also em-
ploy alternative crisis dates from Cornett et al. (2011), namely the
period 20 07Q3-20 09Q2, which largely overlaps with NBER’s U.S.
recession dates. This alternative period allows us to focus on fi-
nancial distress in the U.S., as U.S. banks and borrowers make up
a significant share of the syndicated loan market.2 Our empirical
strategy is as follows. To study loan supply during the crisis, we
1
Syndicated loans are extended by a group of banks to a borrower under a
joint loan agreement. Banks play different roles in a syndicate, ranging from lead
arrangers who negotiate the loan and administer the payments, to the syndicate
participants who act as arms-length lenders. Syndicated loan exposures represent
about a quarter of total commercial and industrial loan exposures on U.S. banks’
balance sheets, and about a third for large U.S. and foreign banks (Ivashina and
Scharfstein, 2010). Furthermore, cross-border syndicated loan exposures account for
20% to 30% of total cross-border loan exposures (Cerutti et al., 2015).
2 Cetorelli and Goldberg (2011).
In 2007 U.S. banks accounted for 34% and U.S. borrowers for 42% of total syndi-
cated loan deal volume.
regress the change in total loan volume between the pre-crisis pe-
riod (20 06Q1-20 07Q2) and the later-stage crisis period (2008Q4-
2010Q1) on indicators of balance sheet strength, both in levels and
interactions. These indicators are measured as of 2007Q2, that is,
before the crisis. We focus on bank balance sheets before the crisis
to identify the impact of liquidity shocks on bank lending during
the global stage of the crisis. In doing so, we exploit variation in
the degree of banks’ exposure to the financial turmoil, which is
arguably exogenous to banks’ lending decisions given that disrup-
tions in funding markets initiated by the U.S. subprime crisis were
largely unanticipated.
An important empirical challenge is to differentiate changes in
the demand for credit from changes in the supply of credit, since
both can be determined by the same aggregate shock. Our strategy
for the intensive margin regressions is to exploit multiple bank-
ing relationships and to retain in the sample only those borrow-
ers that borrowed from at least two banks both in the pre-crisis
and the global crisis periods.3 Hence, we exploit within-borrower
variation in exposure to the liquidity shocks across banks and com-
pare, for each borrower, the growth in lending from multiple banks
that were differentially exposed to financial market turbulence (as
in Khwaja and Mian (2008)). This strategy ensures that demand
effects are purged from the estimates. We define borrowers as
clusters of firms in the same country-specific industry (henceforth
“country-industry”) rather than as individual firms. In addition, we
use a complementary empirical approach to document extensive
margin adjustment of bank credit at the firm level by linking the
probability of a continued bank-firm lending relationship during
the crisis with the bank’s pre-crisis financial health. In addition,
we perform several tests to address potential threats to identifica-
tion and to increase confidence in our interpretations.
Our paper expands several strands of literature. The first is the
traditional literature on the bank lending channel, which empha-
sizes the role of banks in the transmission of monetary policy
to credit aggregates (Kashyap and Stein, 20 0 0; Kishan and Opiela,
20 0 0; Peek and Rosengren, 1995). The health of financial interme-
diaries influences the bank lending channel through the external
finance premium for banks, which relates the health of banks to
their ability to raise market funding (Shin, 2016; Bernanke, 2007).
Our contributions to this literature are threefold. First, we use
micro-data on lending to firms from a large number of countries
and examine an international bank lending channel through which
global banks facing tight funding conditions reduce the supply of
corporate loans. Second, we exploit the cross-country dimension
of our data and document that there was heterogeneity in this
channel based on differential bank recapitalization measures and
sovereign risk. Third, we employ a wide range of measures of cap-
ital, including Basel II regulatory ratios, a leverage ratio based on
high-quality capital, and indicators of capital that incorporate ad-
ditional capital buffers proposed under Basel III.
The second related strand of literature studies the impact of
bank capital on corporate credit. Despite a burgeoning number of
empirical studies, there is no consensus on the effects of higher
capital (and capital requirements) on loan supply.4 Some papers
document a positive effect (Buch and Prieto, 2014; Carlson et al.,
2013; Woo, 2003), often a weak one (Berrospide and Edge, 2010).
Other studies emphasize the negative effects of a higher capital re-
quirement on the loan supply of banks with large capital shortfalls
(Aiyar et al., 2014a; 2014b). Unlike this line of research, which fo-
cuses on the level effect of capital on bank performance, we show
3
This approach has been employed frequently in studies of the bank lending
channel. See, for example, Iyer et al. (2014); Correa et al. (2016); Schnabl (2012) and
4
See Martynova (2015) for a literature survey.
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50
there are differential effects of capital ratios for banks when they
face large liquidity shocks.
Our focus on capital is similar to contributions that argue bank
capital matters for the propagation of monetary, financial, and real
shocks to lending. Di Patti and Sette (2016) and Gambacorta and
Mistrulli (2004) link bank balance sheet conditions to the provision
of credit in Italy. The first study shows that Italian banks that relied
relatively more on interbank funds or conducted relatively more
securitization activities prior to the U.S. subprime crisis had lower
loan growth than other banks.5 The second study shows that fol-
lowing monetary and GDP shocks, banks with a higher amount of
capital above the regulatory minimum exhibit greater loan growth.
Jiménez et al. (2012) and Jiménez et al. (2014) document the role
of bank capital and liquidity in the transmission of monetary and
financial shocks to the Spanish economy. They find that higher lev-
els of capital dampen the transmission of interest rate increases
to the supply of credit. Our approach differs from these papers by
expanding the scope of the analysis from a single domestic mar-
ket to a broad international sample of lenders and borrowers. This
feature of our data allows us to exploit cross-country variation in
public bank recapitalizations and sovereign risk and to highlight
the interplay between financial and sovereign risks during a finan-
cial crisis. In addition, we examine a significantly wider range of
bank capital measures than previously studied.
Our results also expand the literature on capital as a driver
of bank performance during financial crises. Berger and Bouw-
man (2013) show that higher capital enhances banks’ probability
of survival and it increases market share during banking and mar-
ket crises. These effects are especially pronounced for large banks.
Beltratti and Stulz (2012) document the positive effect of pre-crisis
bank capital on stock market returns during the 20 07–20 08 period.
Complementing these studies, our analysis focuses on the supply
of corporate loans as a measure of bank performance but shares
the same emphasis on, and delves deeper into, bank capital as a
critical dimension of financial intermediary health.
Finally, we bring systematic evidence to the question of how
the new bank regulations under Basel III may impact economic re-
covery. Opponents of stricter regulation argue that a tightening in
capital standards may reduce bank profitability and restrict banks’
ability to extend credit, hindering economic growth. Proponents of
stricter regulation argue that tighter rules make the banking sys-
tem safer and benefit banks indirectly by reducing their cost of
funding (BCBS, 2010a). Our evidence emphasizes the positive ef-
fects of high-quality capital on banks’ ability to perform their in-
termediation function during periods of financial stress.
We proceed as follows. In Section 2 we describe the indica-
tors of balance sheet strength and our hypotheses. Section 3 in-
troduces the data, variable definitions, and empirical framework.
Section 4 discusses the baseline results and explores multiple mea-
sures of capital as well as linkages between financial and sovereign
risk. Robustness checks and threats to identification are discussed
in Section 5. Section 6 concludes. The Online Appendix describes
how we processed the data and includes additional results (with
tables and figures labeled “A” in the text).
5
This paper is part of an extensive literature on the impact on lending of
liquidity shocks in bank funding markets during recent financial crises. A par-
tial list of contributions includes papers with a focus on the U.S. subprime cri-
sis such as Antoniades (2016), Ivashina et al. (2015), Dagher and Kazimov (2015),
Allen et al. (2014), Iyer et al. (2014), De Haas and Van Horen (2013), Aiyar (2012),
Cetorelli and Goldberg (2011), Puri et al. (2011); Ivashina and Scharfstein (2010);
and studies of the European sovereign debt crisis, such as Bofondi et al. (2017);
Bottero et al. (2016); Acharya et al. (2016); Correa et al. (2016); Popov and
Van Horen (2015).
37
2. Balance sheet indicators and main hypotheses
Our first key variable is banks’ reliance on wholesale fund-
ing, a dimension of funding structure that has been exten-
sively scrutinized in the literature (see, for example, Aiyar (2012);
Cornett et al. (2011); Ivashina and Scharfstein (2010)). The ex-ante
measurement of that dimension is a proxy for banks’ exposure to
the heightened liquidity risk of 20 07–20 08, when funding markets
nearly shut down. In line with the literature, we expect reliance
on wholesale funding to be negatively associated with the supply of
credit when banks are hit by a liquidity shock. This measure, how-
ever, does not include liabilities such as large deposits, which may
also be runnable. Therefore, we explore the sensitivity of our re-
sults to using the share of short-term funding in total assets as an
alternative.
The second dimension of bank balance sheet health that we in-
vestigate is the capital base. Capital determines a bank’s ability to
absorb losses and is therefore a potential mitigating factor in the
transmission of shocks to lending decisions. Our hypothesis is that
better-capitalized banks are better able to sustain loan growth for a
given level of exposure to stress in bank funding markets. A potential
channel through which this effect works is banks’ cost of funding,
which itself is a function of balance sheet strength.
Several theoretical arguments guide us in forming these hy-
potheses about bank health. The traditional view of the bank
lending channel of monetary policy (Bernanke and Gertler, 1995;
Bernanke and Blinder, 1988) holds that banks faced with a short-
age of loanable funds reduce loan supply because they cannot eas-
ily find alternative funding sources (such as deposits). More re-
cently, Disyatat (2011) revisits the bank lending channel based
on the observation that banks in modern financial systems have
market-based funding sources in addition to retail deposits. Re-
liance on non-deposit funding sources increases the sensitivity
of banks’ funding costs to monetary policy shocks, making the
bank lending channel more important. This phenomenon gener-
ates a “bank balance sheet channel” by which banks’ balance sheet
strength influences their ability to borrow in wholesale funding
markets. Capital plays a role because well-capitalized banks may
be able to raise debt under relatively more favorable terms during
tight market conditions due to lower agency costs.6 A related ar-
gument is that an increase in the cost of funds erodes bank prof-
its and hence capital. As a result, capital-constrained banks may
choose to forego profitable lending opportunities when interest
rates rise to avoid being undercapitalized in the future. This is the
“bank capital channel” of monetary policy described in Van den
Heuvel (2012, 2002).
Our next hypothesis concerns the measure of capital that best
captures banks’ financial strength. We anticipate that the effective-
ness of bank capital in mitigating the negative impact of liquidity
shocks on lending depends on its quality. The quality of capital is
central to the Basel III regulatory framework. Proposals for new
capital standards are motivated by the fact that banks which re-
quired government support during the crisis nonetheless appeared
to meet regulatory capital thresholds before the crisis. Not only
did Basel II regulatory capital ratios fail to raise concerns before
the crisis, they also failed to accurately predict the institutions
that would incur the highest losses or that would ultimately fail
(Haldane and Madouros, 2012; IMF, 2009).
A potential explanation for these findings is banks’ manip-
ulation of risk-weights under the Basel II regulatory regime.
Mariathasan and Merrouche (2014) find evidence to this effect
in a sample of banks from OECD countries. They show that risk
6
For theoretical and empirical treatment of this idea, see Bernanke (2007),
Gambacorta (2005), Kishan and Opiela (2000), Stein (1998) and Holmstrom and Ti-
role (1997).
38 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50
weights decline after banks start using internal ratings-based mod-
els, and that this decline is larger for banks with lower initial cap-
ital and that are subject to weaker supervision. Plosser and San-
tos (2014) document that U.S. banks with low capital are more
likely to under-report risk based on internal models. In addition,
Acharya et al. (2014) show that bank capitalization relative to to-
tal assets is better correlated with market indicators of stress than
bank capitalization relative to risk-weighted assets.
Another explanation is that standard regulatory capital mea-
sures such as Tier 1 capital and total regulatory capital (TRC),
the sum of Tier 1 and Tier 2 capital, include not only common
equity but also capital instruments with limited loss-absorbing
ability (e.g., goodwill, deferred tax assets, and investments in
other financial institutions).7 To address these limitations, Basel
III proposes that the threshold for regulatory capital be higher
and that it include only capital instruments with strong loss-
absorption features, such as common equity and equity-like debt
instruments that can be used to write off losses (BCBS, 2010b).8
Acharya et al. (2011) argue that unlike the Tier 1 and TRC ra-
tios, which define capital as the buffer against losses that pro-
tects depositors, common equity is a concept of capital that is
aligned with the interests of creditors. Therefore, tangible equity, a
“market-determined capital requirement,” is preferred by investors
over regulatory ratios as a yardstick for bank health.
In light of the above, we consider not only regulatory mea-
sures of capital such as Tier 1 and TRC ratios but also the TCE
ratio, which is close in spirit to the leverage ratio of Basel III.
How do we expect these different capital ratios to fare as predic-
tors of banks’ ability to withstand financial shocks? Regulatory ra-
tios may fare poorly for two reasons. First, in the numerator, they
may contain equity and equity-like debt instruments with limited
loss-absorption ability. Second, in the denominator they use risk-
weighted assets, which may suffer from risk weight manipulation
and may fail to reflect the true riskiness of assets. By contrast,
the TCE ratio does not include intangible assets, goodwill, and pre-
ferred stock, and hence captures high-quality capital. In addition,
its denominator is given by total tangible assets, which are not
contaminated by risk weights. As a consequence, we expect that
the TCE ratio will correlate more closely with banks’ loan supply dur-
ing a crisis compared to standard regulatory measures of capital.
3. Data and empirical strategy
3.1. Main data sources and variables
Lending data and period of analysis. Loan-level data on close to
39,0 0 0 syndicated loans (comprising term loans and credit lines)
granted between 2006Q1 and 2010Q1 were obtained from Dealogic
Loan Analytics. We divide the sample period into a pre-crisis and
a crisis period, with the latter period further divided into a build-
up phase and a later, global phase. The build-up phase of the
crisis (20 07Q3-20 08Q3) covers the period during which the U.S.
7
For instance, Tier 1 may include non-redeemable non-cumulative preferred
stock and minority interest. Under Basel II, capital instruments other than high-
quality core capital cannot make up more than 15% of Tier 1 capital. Similarly, Tier
2 capital can include hybrid capital instruments, revaluation reserves, and subor-
dinated debt. Under Basel II, Tier 2 capital used in the calculation of TRC cannot
exceed Tier 1 capital.
8 also show the baseline results hold up in the subsample of loans with observed
Basel III also proposes placing limits on a simple leverage ratio (defined as Tier
1 capital to total assets), and increasing the transparency and soundness of the risk
weights used in computing risk-weighted assets, especially for asset classes prone
to sudden changes in liquidity. Beltratti and Stulz (2012) show that banks with
higher levels of tangible equity before the crisis had better stock market perfor-
mance during 20 07–20 08. Mayes and Stremmel (2014) show that the simple lever-
age ratio outperforms risk-weighted measures of capital adequacy in predicting fail-
ures of U.S. banks during 1992–2012.
subprime crisis started and gradually intensified.9 The six quar-
ters preceding the build-up phase of the crisis (20 06Q1-20 07Q2)
constitute the pre-crisis period. The six quarters between 2008Q3-
2010Q1 represent the later stage of the crisis, which is the main
focus of our study. This period, the global financial crisis, covers
the entirety of 2009, which was identified as the most synchro-
nized global recession among countries (IMF, 2012). It also covers
three quarters of the US recession as dated by the NBER.
In analyzing loan growth between the pre-crisis period and
the global financial crisis period, we drop the loans signed dur-
ing the build-up phase. We do so for the following reason. Ideally,
we would like to analyze the change in the supply of bank loans
around a major event such as the Lehman bankruptcy given that
such an event would clearly separate the pre- and post-shock peri-
ods. If this event were unanticipated, we could assume that banks
did not adjust portfolios before the event. In reality, the U.S. sub-
prime crisis and early signs of distress in money markets preceded
the Lehman bankruptcy in September 2008, which means that the
Lehman event may not have been entirely unanticipated. To ad-
dress this issue, we work with a shock period—the entire build-
up phase of the crisis—and we compare the ‘before’ and ‘after’
of this shock period. We also show results for an alternative cri-
sis period, the “U.S. crisis,” which permits a standard before-after
comparison. Specifically, we employ the financial crisis dates from
Cornett et al. (2011), covering 20 07Q3-20 09Q3, which largely over-
lap with the NBER U.S. recession dates.
Following the literature, we obtain bank-level loan volumes by
aggregating syndicated loan amounts at the bank-borrower level
(see, e.g., De Haas and Van Horen (2013, 2012); Giannetti and
Laeven (2012a,b)). For 41% of loans (24% of syndicated loans and
17% single-lender loans), Loan Analytics reports the individual loan
amounts contributed by each lender. For the remainder of the sam-
ple we use a regression model to predict the individual shares out
of sample, similar to De Haas and Van Horen (2013). Specifically,
we regress the log-shares against a comprehensive set of vari-
ables including loan amount, syndicate size, and dummies for year-
quarters, loan currency, lender role, lender and borrower nation-
ality, and borrower industry. The model performs well in-sample,
with an adjusted R-squared of 74%.10 We then use the coefficients
of the model to predict the shares out of sample and multiply
them by the total loan amount to obtain individual loan amounts
for syndicate members.11
We examine both the intensive and extensive margins of ad-
justment in bank credit. The syndicated loan market grew rapidly
during the decade preceding the crisis, with total deal volume
reaching more than USD 4.5 trillion in 20 07 (Fig. 2). Between 20 07
and 2010 the syndicated loan market experienced a sharp down-
ward adjustment, most of which was on the extensive margin.12
9
Earlier during this period, Bear Stearns hedge funds requested assistance (June
and July 2007), BNP Paribas announced that it was suspending redemptions on its
real estate investment funds (August 2007); and Countrywide disclosed significant
subprime-related losses for 2007 (January 2008). Events pointing to persisting fi-
nancial distress continued with the failure of major financial institutions in 2008
and culminated in that of Lehman Brothers in September 2008.
10
We find that the prediction errors are not systematically related to key bank
characteristics other than bank specialization and entity type (Table A1), therefore
we include bank specialization and entity type dummies in all specifications.
11
In the Online Appendix we explore alternative approaches to assigning individ-
ual loan shares to ensure our primary results are not driven by this approach. We
individual shares despite a substantial drop in sample size (Table A2).
12
From its peak in 2007, total deal volume fell by more than 30% in 2008 and a
further 18% in 2009. Given the global decline in economic activity after the crisis,
reduced loan demand was likely a significant factor behind the observed decline
in credit. In this analysis we do not attempt to allocate the total decline in credit
in supply versus demand factors, but rather to focus on a single supply-side factor,
namely banks’ ex-ante balance sheet health.
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50 39

Fig. 2. Global issuance of syndicated loans.

This chart depicts total syndicated loan deal volume issued by banks, by borrower income level (Panel A) and borrower nationality (Panels B-C) during 20 0 0–2010, in current
USD billion. Advanced economies are defined according to the IMF’s World Economic Outlook (September 2013). Data sources: Dealogic Loan Analytics.

The number of individual borrowers dropped by a third in the
post-Lehman period, but the average loan amount remained al-
most unchanged (Kapan and Minoiu, 2014). This phenomenon sug-
gests there was little intensive margin adjustment of credit at the
firm level. Therefore, we perform the intensive margin analysis at
a level of aggregation higher than the individual firm, and de-
fine our borrowers as country-industry clusters by adding up loan
volumes across firms within each industry (e.g., US-healthcare,
Turkey-telecommunications, Germany-metal and steel).13 Then, we
retain only those industries that borrowed from at least two banks
both before the crisis and during the global stage of the crisis (re-
spectively, the U.S. crisis), which allows us to control for simulta-
neous changes in credit demand with interacted country × industry
fixed effects (in the spirit of Khwaja and Mian (2008)).
An important caveat to this strategy is that country × industry
fixed effects control for credit demand shifts insofar as all firms in
a given country-industry cluster receive the same demand shock
13
There is a maximum of 25 industries per country (the Online Appendix lists
the industries and their contributions to total borrowing). For a similar set-up
employing a level of aggregation that is higher than the individual firm, see
Acharya et al. (2016), Auer and Ongena (2016) and De Haas and Van Horen (2013).
respectively in the pre-crisis and crisis periods. We complement
our baseline results with a bank-firm level analysis where we ex-
amine the probability of a continued lending relationship for bank-
firm pairs during the crisis period conditional on a pre-crisis lend-
ing relationship, and control for credit demand with firm fixed ef-
fects.14
Bank balance sheet data. We match the lender banks from
Dealogic Loan Analytics with balance sheet information from
Bankscope and SNL Financial. Given the absence of a common
identifier across datasets, we perform the match using bank names
and nationalities while making adjustments for name and owner-
ship changes. (See Online Appendix for details.) In the final dataset,
we have data on loans extended by 805 banks from 55 countries
to firms from 448 country-industries in 48 countries.
14
Another caveat is that Khwaja and Mian (2008) setup ignores general equilib-
rium linkages between the bank-lending and the firm-borrowing channels, so there
is no guarantee that our estimates are consistent with aggregate lending and bor-
rowing patterns. This issue, discussed in Amiti and Weinstein (2018), can be re-
solved by imposing additional constraints on the estimation. Given the global di-
mension of our sample, imposing equilibrium constraints to ensure that the micro-
estimates match global macroeconomic aggregates would be particularly difficult,
so our results should be interpreted with caution.
40 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50
Fig. 3. Trends in bank reliance on wholesale funding.
This chart shows total wholesale funding (defined as non-deposit liabilities) in USD
terms and relative to balance sheet size during 20 0 0–2010 for the banks in our
regression sample. Data sources: Bankscope, SNL Financial.
Exposure to the liquidity shock. Our main variable for bank ex-
posure to financial market turbulence is banks’ degree of reliance
on wholesale funding, measured as non-deposit liabilities in % of
total liabilities.15 Fig. 3 depicts a significant increase in reliance on
wholesale funding for the banks in our sample prior to 20 07–20 08,
both in aggregate terms and relative to the size of bank balance
sheets.16 Descriptive statistics for the data are shown in Table 1.
3.2. Empirical model for intensive margin of lending
In the main analysis, we estimate the impact of bank balance
sheet variables measured before the crisis on the subsequent sup-
ply of loans. Our specification is given by:
Li jk = α + ηk + δ j + β Wi j + Xi j γ + i jk, (1)
where Lijk is the difference in log(total loan volume) extended by
bank i located in country j to firms in country-industry k between
the pre-crisis and the global financial crisis (or U.S. crisis) periods;
Wij is wholesale funding (a proxy for the size of the bank-specific
liquidity shock); Xij is a vector of bank characteristics; ηk are bor-
rower fixed effects; δ j are bank nationality fixed effects; and  ijk is
the error term.
We assume that banks did not anticipate the U.S. subprime
crisis and therefore did not adjust lending in anticipation of the
shocks (i.e., Cor r (Wi j , i jk ) = 0). If bank-specific liquidity shocks
were correlated with loan demand, for instance, if borrowers de-
manded less credit from banks that were more affected by the rise
in the cost of funding, then we would have Corr(Wij ,  ijk ) = 0 and
the OLS estimator of β without ηk would be biased (Khwaja and
Mian, 2008). To control for loan demand shifts, we include fixed
effects ηk , for borrower country-industry pairs, denoted coun-
try × industry. This strategy allows us to compare lending to the
firms in a given country-industry cluster from banks with differen-
tial exposure to the liquidity shocks. We discuss potential threats
to this identification strategy that might be caused by non-random
matching between borrowers and lenders or by pre-existing differ-
ential trends in loan growth in Section 5.1.
Furthermore, we add bank nationality effects δ j to compare the
lending behavior of banks within the same country. These fixed ef-
15
Removing equity from non-deposit liabilities leaves the results unchanged.
16
Note that “non-deposit funding” contains subgroups of liabilities with different
sensitivities to market upheaval. Unfortunately, we do not have sufficiently detailed
data on bank liabilities to further break down this aggregate.
fects control for exchange rate movements and changes in macroe-
conomic policies in banks’ home countries between the pre-crisis
and crisis periods. They also account for differences in the mag-
nitude of market illiquidity across countries, which may be influ-
enced by the level of development of the interbank market, the
presence of foreign banks, and the degree of substitutability be-
tween deposit and non-deposit liabilities within each country.
To avoid potential confounding effects from bank characteris-
tics that may correlate with exposure to the liquidity shocks, in
most specifications we add the following controls gathered in Xij :
return on assets, NPLs (% gross loans), liquid assets (% total assets),
bank size (total assets), risk profile (risk-weighted assets (RWA)
in % of total assets), and capital. Further, we include indicators
for bank specialization (commercial bank, bank holding company,
and other) and entity type (independent company, single location
bank, global owner, and subsidiary). In all regressions the obser-
vations are weighed by the inverse of the number of country-
industries borrowing from each bank to ensure that the charac-
teristics of very active banks do not drive our results due to over-
representation in the dataset.
4. Results
4.1. Liquidity shocks and intensive margin of lending
In the baseline specifications we regress the growth rate of to-
tal loan volume between the pre-crisis and the global financial
crisis (or U.S. crisis) periods against banks’ pre-crisis reliance on
wholesale funding. In Table 2 we report OLS estimates that do not
control for shifts in demand (column 1) and OLS estimates with
country × industry fixed effects that do (columns 2–5). The coeffi-
cient estimates on wholesale funding would be biased if the bank-
specific shocks were correlated with demand. This appears to be
the case, as we notice larger magnitudes in column 1 than in sub-
sequent columns where we control for loan demand.
In line with the literature, the estimates show that banks that
relied more heavily on wholesale funding before the crisis reduced
loan supply more than other banks. The estimated magnitudes in-
dicate a 1 percentage point increase in wholesale funding led to a
decrease in the supply of loans by 0.6 to 0.8% during the global cri-
sis (columns 2–3) and by 0.4 to 0.5% during the U.S. crisis (columns
4–5). Note that these estimates apply to the subset of firms that
were subject to a credit supply shock and to which we are able to
apply the Khwaja and Mian (2008) approach. In columns 3 and
5 we introduce an interaction term between wholesale funding
and U.S. borrower, which yields a statistically insignificant coeffi-
cient, suggesting both U.S. and non-U.S. borrowers suffered a credit
crunch of equal magnitude regardless of crisis definition.17 These
results corroborate previous studies on the transmission of finan-
cial market shocks through the bank lending channel, and provide
evidence for the “disciplining effect” of wholesale funding, in that
financial institutions reliant on market-based funding face the risk
of creditor runs during crises (Huang and Ratnovski, 2011).
4.2. The mitigating effect of high-quality bank capital
Our main goal is to determine whether the estimated negative
impact of bank liquidity shocks on the loan growth depends on
capital adequacy. Capital regulation has been at the heart of the
global regulatory reform agenda, with debates centering on the im-
pact of capital on lending and optimal capital levels. We ask to
what extent ex-ante capital buffers play a role in mitigating the
17
The results are robust to controlling for additional interaction terms of every
bank characteristic with capital and for co-lender balance sheet characteristics (Ta-
ble A3), as well as other components of capital (Table A4).
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50 41

Table 1
Descriptive statistics.

Obs Mean St. Dev. P5 P50 P95

Log-difference in lending (x 100) 805 −3.07 142.55 −237.86 −0.18 230.07

Wholesale funding (% total liabilities) 711 32.33 26.79 1.49 23.98 86.91
Tier 1 ratio 618 9.83 3.38 6.04 9.06 18.20
Total regulatory capital (TRC) ratio 627 12.39 2.85 8.96 11.50 19.59
Tangible common equity (TCE) ratio 761 6.85 4.29 2.09 5.97 16.00
Excess capital - Tier 1 ratio 524 1.54 2.77 0.00 0.00 9.13
Excess capital - TRC ratio 524 1.59 2.52 0.00 0.38 8.33
Excess capital - TCE ratio 519 1.45 2.75 0.00 0.00 7.55
Return on assets 755 0.92 0.87 −0.05 0.80 2.51
Non-performing loans (% gross loans) 642 2.64 2.43 0.14 1.80 7.61
Loan loss reserves (% gross loans) 685 1.98 2.07 0.32 1.48 4.96
Liquid assets (% total assets) 762 17.40 15.87 2.33 11.83 47.76
Risk profile (RWA/Total assets) 566 64.09 18.16 30.76 63.36 94.30
Total assets (2005 USD bn) 770 118.55 303.03 1.14 20.33 708.52
Type of entity, of which:
Branch location 805 0.12 0.04 0.00 0.00 0.00
Controlled subsidiary 805 0.52 0.50 0.00 1.00 1.00
Global owner 805 0.31 0.46 0.00 0.00 1.00
Independent company 805 0.03 0.17 0.00 0.00 0.00
Single location bank 805 0.14 0.34 0.00 0.00 1.00
Specialization, of which:
Commercial banks 805 0.85 0.36 0.00 1.00 1.00
Bank holding company 805 0.05 0.21 0.00 0.00 0.00
Other 805 0.11 0.31 0.00 0.00 1.00
Bail-out 55 0.17 0.38 0.00 0.00 1.00

This table presents descriptive statistics for selected regression variables. The main dependent variable in the analysis is the change in log(total loan volume)
between the pre-crisis (20 06Q1-20 07Q2) and crisis period. We use two crisis periods: the global financial crisis (2008Q3-2010Q1) and the U.S. crisis as defined
in Cornett et al. (2011) (20 07Q2-20 09Q3). Wholesale funding refers to non-deposit liabilities. Bail-out, a country-level variable, takes value 1 if a capital
injection program took place in a given country during 2008Q4-2010Q1. All variables (except the log-difference in loan volume, excess capital, liquid asset
ratio, and risk profile) are winsorized at the 1st and 99th percentiles. All bank variables are measured as of 2007Q2 or 2007Q1 if Q2 data are missing (if
quarterly data are missing, then they are measured as the mid-point of 2006 and 2007 data, or as of end-2006). Due to the calculation of a country-specific
countercyclical capital buffer, excess capital is calculated as of end-2016. Data on government assistance programs was assembled on the basis of the BIS CGFS
“Financial sector rescue plan” database and several sources (Bloomberg, Factiva, and SNL Financial). The Online Appendix describes the data transformations
and the regression sample in detail. Data sources: BIS, Dealogic Loan Analytics, Bankscope, SNL Financial, Markit, Thomson Reuters Worldscope, International
Financial Statistics, World Economic Outlook.

Table 2
Wholesale funding and intensive margin of bank lending.

(1) (2) (3) (4) (5)

Global financial crisis U.S. crisis

Wholesale funding −1.041∗ ∗ ∗ −0.820∗ ∗ ∗ −0.619∗ ∗ −0.503∗ ∗ −0.418∗

(0.358) (0.289) (0.269) (0.245) (0.244)
Wholesale funding × US borrower −0.650 −0.289
(0.479) (0.413)
Capital −1.481 −0.550 −0.669 −0.641 −0.703
(1.489) (1.236) (1.220) (1.045) (1.048)
ROA −7.722 −1.497 −1.673 0.980 0.825
(8.371) (7.456) (7.367) (6.363) (6.353)
NPLs 0.170 1.266 1.502 −0.662 −0.577
(2.966) (2.586) (2.570) (2.293) (2.282)
Liquid asset ratio 0.154 −0.163 −0.181 −0.121 −0.124
(0.429) (0.419) (0.414) (0.347) (0.344)
Size (total assets) −0.029∗ ∗ −0.037∗ ∗ ∗ −0.037∗ ∗ ∗ −0.023∗ −0.023∗
(0.013) (0.013) (0.013) (0.012) (0.012)
Risk profile 0.059 −0.139 −0.182 0.064 0.049
(0.369) (0.373) (0.378) (0.284) (0.286)
Borrower country × industry FE No Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes Yes
Observations 6,067 6,008 6,008 8,328 8328
R-squared 0.129 0.335 0.336 0.282 0.282

This table shows the baseline regressions that link bank wholesale funding to loan supply (intensive margin). The dependent variable is the difference in
log(total loan volume) from bank i to borrower country-industry j between the pre-crisis (20 06Q1-20 07Q2) and crisis periods. Columns 1–3 refer to the global
financial crisis (2008Q3-2010Q1) and columns 4–5 to the U.S. crisis as defined in Cornett et al. (2011) (20 07Q2-20 09Q3). All bank variables are measured as
of 2007Q2 or 2007Q1 if Q2 data are missing. Capital refers to the TCE ratio. Observations are weighed by the inverse of the number of country-industries to
which a given bank lends. Standard errors are clustered on bank. ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: Dealogic Loan
Analytics, Bankscope, and SNL Financial.
42 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50

Table 3
Wholesale funding and intensive margin of bank lending: The role of capital.

(1) (2) (3) (4)

Global financial crisis U.S. crisis

Tier 1 ratio TRC ratio TCE ratio TCE ratio

∗∗ ∗∗ ∗∗∗
Wholesale funding −1.323 −1.486 −1.771 −1.428∗ ∗ ∗
(0.567) (0.742) (0.426) (0.394)
Wholesale funding × Capital 0.043 0.047 0.117∗ ∗ 0.114∗ ∗ ∗
(0.048) (0.052) (0.046) (0.037)
Capital 1.809 2.401 −4.122∗ ∗ −4.117∗ ∗ ∗
(2.163) (2.437) (1.889) (1.374)
ROA −6.805 −6.128 −8.640 −5.270
(7.799) (7.635) (8.411) (6.631)
NPLs 0.770 0.949 −0.362 −2.100
(2.654) (2.734) (2.617) (2.389)
Liquid asset ratio −0.373 −0.380 −0.299 −0.256
(0.415) (0.420) (0.410) (0.346)
Size (total assets) −0.025∗ −0.028∗ ∗ −0.029∗ ∗ −0.014
(0.013) (0.013) (0.013) (0.013)
Risk profile 0.031 −0.012 −0.249 −0.050
(0.359) (0.362) (0.365) (0.287)
Borrower country × industry FE Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes
Observations 6,030 6,030 6,008 8,328
R-squared 0.341 0.341 0.338 0.285

This table shows our baseline regressions that link bank wholesale funding and capital to loan supply (intensive margin). The dependent variable is the
difference in log(total loan volume) from bank i to borrower country-industry j between the pre-crisis (20 06Q1-20 07Q2) and crisis periods (the global financial
crisis (2008Q3-2010Q1) and the U.S. crisis as defined in Cornett et al. (2011) (20 07Q2-20 09Q3)). All bank variables are measured as of 2007Q2 or 2007Q1 if Q2
data are missing. Capital refers to the Tier 1 ratio (column 1), TRC ratio (column 2) and TCE ratio (columns 3–4). Tier 1 and TRC are in % or RWA. Observations
are weighed by the inverse of the number of country-industries to which a given bank lends. Standard errors are clustered on bank. ∗ indicates statistical
significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: Dealogic Loan Analytics, Bankscope, and SNL Financial.

transmission of financial sector shocks for banks hit by liquidity
shocks.
To link bank capital to loan supply we consider three main cap-
ital ratios: regulatory Tier 1 (in % of RWA), TRC (in % of RWA), and
the TCE ratio (in % of total tangible assets). To test whether higher
capital mitigated the negative impact of the shocks on loan growth,
we interact these measures with wholesale funding. We continue
to control for other bank characteristics, including risk profile,
which allows for the possibility that better-capitalized banks may
have been in a better position to take risks.
The estimates are shown in Table 3. When we use the reg-
ulatory capital ratios to capture balance sheet strength (columns
1 and 2), we find that the extent to which exposed banks re-
duced their supply of credit is unrelated to pre-crisis capital (the
estimated coefficients on the interaction terms are statistically in-
significant). However, the results are starkly different when we use
the TCE ratio (columns 3 and 4). Banks that were more vulnerable
to freezes in funding markets cut lending less than other banks
if they had more high-quality capital. At the sample mean of the
TCE ratio (6.85%), loan volume fell by 0.97% with every percentage
point increase in reliance on wholesale funding (column 3).18 Fo-
cusing on the estimates in column 3, an increase in bank capital
by one standard deviation (4.28 %) from the sample mean would
halve the negative effect of the liquidity shock, reducing it from
0.97 to 0.47 %. Conversely, a reduction in bank capital by one stan-
dard deviation from the mean would raise the effect of the liquid-
ity shock to 1.47 %.19
The above results are robust to comparing loan growth during
the U.S. crisis period relative to the pre-crisis period, which indi-
cates that they are not influenced by the choice of crisis dates (col-
umn 4). Overall, they suggest that the standard regulatory capital
ratios are not helpful in gauging banks’ ability to sustain lending
in the face of liquidity shocks. By contrast, capital with high loss-
absorbing potential as captured in the TCE ratio helps distinguish
banks with better ability to sustain lending in the face of the same
liquidity shock. These findings lend empirical support for the Basel
III proposal to raise the quantity and quality of regulatory capital
by shifting the focus towards common equity.
4.3. Alternative measures of bank capital
A natural question is whether our results are driven by the nu-
merator or the denominator of each regulatory capital ratio, that
is, by the overstatement of true loss-absorbing potential or by the
mismeasurement of risk. To examine this question, in Table 4 we
run the main regressions with three alternative capital ratios that
change the denominator: Tier 1/total assets, TRC/total assets, and
TCE/RWA. The results show that Tier 1 in % of total assets is the
only ratio that yields similar results to our preferred TCE ratio
(columns 1 and 4). This finding is in line with our priors given that
Tier 1 primarily contains core capital with unlimited loss absorp-
tion ability such as common shares, reserves, and retained earn-
ings.20 By contrast, the ratio of TRC to total assets does not yield a
significant interaction with wholesale funding, likely because TRC
contains elements with limited or no loss-absorbing capacity, such

18
Column 3: 1.771+0.117 × 6.85 = 0.97%.
19
In column 3–4, the coefficients on the TCE ratio are negative and statistically
significant, but we fail to reject the null that the marginal effect of capital is zero
at the sample mean of wholesale funding (the p-values are 0.929 for column 3 and
0.791 for column 4). When we split the sample into low- and high-capital banks,
we find that the negative effect from the full sample is driven by the low-capital
subsample and that high-capital banks are largely unaffected by exposure to liquid-
ity shocks as captured by the wholesale funding variable.
20
Under Basel II, Tier 1 capital also contained minority interest, an equity
investment in a non-consolidated subsidiary. Therefore, a parent bankâs expo-
sure to such a subsidiary was limited to its investment in the subsidiary. How-
ever, in practice the parent bank guaranteed all the liabilities of the subsidiary.
Gong et al. (2015) show that minority interest allowed U.S. banks to circumvent
capital regulation before the financial crisis, effectively reducing the capitalization
rate below the regulatory minimum requirement.
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50 43

Table 4
Wholesale funding, capital, and intensive margin of bank lending: Alternative measures of capital.

(1) (2) (3) (4) (5) (6)

Global financial crisis U.S. crisis

Tier1/Assets TRC/Assets TCE/RWA Tier1/Assets TRC/Assets TCE/RWA

∗∗∗ ∗∗∗ ∗∗ ∗∗∗ ∗∗
Wholesale funding −1.671 −1.509 −0.702 −1.226 −1.116 −0.756∗ ∗ ∗
(0.509) (0.580) (0.298) (0.451) (0.533) (0.281)
Wholesale funding × Capital 0.122∗ 0.085 −0.019 0.109∗ ∗ 0.084 0.035
(0.069) (0.069) (0.036) (0.054) (0.059) (0.030)
Capital −2.993 −1.769 1.314 −3.028 −1.866 −0.631
(3.275) (3.335) (1.439) (2.242) (2.616) (1.202)
ROA −6.065 −4.430 −2.208 −2.933 −1.824 0.941
(8.103) (7.792) (7.524) (6.588) (6.487) (6.402)
NPLs 0.248 0.396 1.468 −1.284 −1.124 −0.649
(2.714) (2.793) (2.622) (2.411) (2.450) (2.325)
Liquid asset ratio −0.304 −0.259 −0.174 −0.237 −0.201 −0.199
(0.413) (0.416) (0.415) (0.347) (0.344) (0.354)
Size (total assets) −0.028∗ ∗ −0.030∗ ∗ −0.036∗ ∗ ∗ −0.016 −0.018 −0.020∗
(0.013) (0.013) (0.013) (0.013) (0.013) (0.012)
Risk profile −0.318 −0.327 −0.150 −0.086 −0.108 0.097
(0.396) (0.458) (0.394) (0.308) (0.360) (0.292)
Borrower country × industry FE Yes Yes Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes Yes Yes
Observations 5,994 5,956 5,956 8,244 8,244 8,264
R-squared 0.320 0.325 0.325 0.265 0.264 0.264

This table shows our baseline regressions that link bank wholesale funding and alternative measures of capital to loan supply (intensive margin). The dependent
variable is the difference in log(total loan volume) from bank i to borrower country-industry j between the pre-crisis (20 06Q1-20 07Q2) and crisis periods (the
global financial crisis (2008Q3-2010Q1) and the U.S. crisis as defined in Cornett et al. (2011) (20 07Q2-20 09Q3)). All bank variables are measured as of 2007Q2
or 2007Q1 if Q2 data are missing. The capital variables are indicated as column heading. Observations are weighed by the inverse of the number of borrowing
country-industries to which each bank lends. Standard errors are clustered on bank. ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data
sources: Dealogic Loan Analytics, Bankscope, and SNL Financial.

as hybrid equity-like instruments, subordinated debt, asset revalu-
ation reserves, goodwill, and deferred tax assets. TCE in % of RWA
also yields insignificant results (columns 3 and 6).
To summarize, none of the ratios using RWA in the denom-
inator is able to reflect banks’ ability to sustain lending during
the crisis. However, once we use un-weighted assets to scale cap-
ital, both TCE and Tier 1 show significant results, with TCE being
the stronger measure. The weakest measure of capital, TRC, does
not yield any meaningful results regardless if it is scaled by total
or risk-weighted assets. Consistent with our hypotheses, we con-
clude that the mismeasurement of risk embedded in RWA distorts
the ability of capital to reflect true balance sheet strength, and
the quality of capital plays a key role in revealing banks’ financial
strength.
4.4. “Excess capital,” conservation buffer, and countercyclical capital
buffer
So far we have examined the ability of a range of capital ratios
to capture balance sheet health. Here we ask whether the amount
of excess capital held by banks before a crisis, that is, the amount
of capital above and beyond the minimum required to meet pru-
dential standards, is a determinant of loan growth during a crisis.
In a panel of Italian banks, Gambacorta and Mistrulli (2004) show
that “excess capital” (defined as actual capital less the regulatory
minimum) influences banks’ lending response to monetary policy
and real shocks, documenting a bank capital channel. In particular,
banks with higher capital are relatively better able to absorb tem-
porary reductions in borrower creditworthiness and to shield their
lending from a monetary policy tightening.
We define excess capital taking into account two recent inno-
vations to the Basel III capital regulation framework—the conser-
vation buffer (henceforth denoted CB) and the countercyclical cap-
ital buffer (denoted CCB). By the end of a phase-in period spanning
2013–2019, adherence to the Basel III accord requires banks to hold
a CB of 2.5 % and a CCB that depends on aggregate credit growth
in the economy. Although both the CB and the CCB apply to the
current risk-weighted approach to scaling regulatory capital, for il-
lustrative purposes we also apply these additional buffers to the
TCE ratio, as described below.
The CB is a fixed 2.5 % while the CCB needs to be calculated
for each country. To estimate the credit cycle in each lender coun-
try, we use quarterly data for the credit-to-GDP ratio over 20 0 0Q1-
2006Q4. We follow the guidelines in BCBS (2011) and the detailed
description in Alessandri et al. (2015) to estimate the credit-to-GDP
trend in each lender country using a one-side recursive Hodrick-
Prescott filter.21 We then translate the quarterly credit-to-GDP gap,
the difference between actual and trend credit-to-GDP, in a CCB
rate, expressed in % of RWA, which is equal to zero if the credit-to-
GDP gap is lower than 2 %; 2.5 percentage points if the credit gap
is higher than 10%, and 0.325 × GAP-0.625 if the gap is between
2 % and 10 %. The average estimated CCB across countries gradu-
ally increases over time from 0 in 2004 to 0.61 percentage points
by 2006Q1 (see Fig. A3).
For each regulatory capital ratio we compute excess capital rel-
ative to the regulatory thresholds (8.5 % for the Tier 1 ratio and
10.5% for TRC). These thresholds already include the CB. To these
thresholds we add the country-specific CCB as of 2006Q4. Banks
that have a capital shortfall relative to these thresholds are as-
signed zero excess capital. We use the same procedure to calculate
a measure of excess high-quality capital given that the TCE ratio is
close in spirit with the leverage ratio of Basel III. For the TCE ratio
we use a regulatory threshold of 5.5% (that is, the minimum 3 %
required of the leverage ratio plus a CB of 2.5 %).
21
Quarterly data on credit comes from the International Finance Statistics (IFS)
and quarterly GDP comes from the World Economic Outlook (WEO). Of the 55 bank
nationalities in our sample, we are able to carry out the analysis for 51 countries
for which quarterly credit-to-GDP data are available. The banks in the 51 countries
included in this analysis account for 98.1% of the total loan deal volume in the
original sample.
44 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50

Table 5
Wholesale funding, capital, and intensive margin of bank lending: Conservation buffer and countercyclical capital buffer.

(1) (2) (3) (4) (5) (6)

Global financial crisis U.S. crisis

Tier 1 ratio TRC ratio TCE ratio Tier 1 ratio TRC ratio TCE ratio
∗∗∗ ∗∗∗ ∗∗∗ ∗∗ ∗
Wholesale funding −0.925 −0.939 −1.237 −0.557 −0.491 −0.839∗ ∗ ∗
(0.323) (0.337) (0.310) (0.274) (0.271) (0.284)
Wholesale funding × Excess capital 0.022 0.028 0.168∗ ∗ 0.005 −0.023 0.105∗
(0.062) (0.066) (0.077) (0.055) (0.056) (0.061)
Excess capital 3.135 3.982 −4.689∗ ∗ 1.428 1.805 −3.498∗ ∗
(2.877) (3.278) (2.357) (2.372) (2.670) (1.619)
ROA −7.078 −6.883 −9.024 −4.884 −4.002 −5.264
(9.225) (9.262) (9.062) (7.540) (7.618) (7.296)
NPLs −0.732 −0.665 −0.537 −1.442 −1.239 −1.556
(2.810) (2.860) (2.768) (2.461) (2.482) (2.481)
Liquid asset ratio −0.241 −0.292 −0.222 −0.169 −0.120 −0.217
(0.453) (0.462) (0.448) (0.387) (0.382) (0.372)
Size (total assets) −0.026∗ ∗ −0.027∗ ∗ −0.030∗ ∗ −0.018 −0.020 −0.016
(0.013) (0.013) (0.013) (0.013) (0.013) (0.012)
Risk profile 0.136 0.126 −0.157 0.233 0.216 0.105
(0.406) (0.409) (0.417) (0.309) (0.305) (0.318)
Borrower country × industry FE Yes Yes Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes Yes Yes
Observations 5,572 5,572 5,551 7,720 7,720 7,687
R-squared 0.336 0.337 0.336 0.271 0.271 0.274

This table shows our baseline regressions that link bank wholesale funding and alternative measures of “excess capital” to loan supply (intensive margin). The
dependent variable is the difference in log(total loan volume) from bank i to borrower country-industry j between the pre-crisis (20 06Q1-20 07Q2) and crisis
periods (the global financial crisis (2008Q3-2010Q1) and the U.S. crisis as defined in Cornett et al. (2011) (20 07Q2-20 09Q3)). All bank variables except “Excess
capital” are measured as of 2007Q2 or 2007Q1 if Q2 data are missing. Excess capital is the amount by which each banks’ capital ratio (indicated as column
heading) exceeds the Basel III regulatory threshold, including a fixed conservation buffer of 2.5% and a country-specific countercyclical capital buffer estimated
for end-2006. Observations are weighed by the inverse of the number of borrowing country-industries to which each bank lends. Standard errors are clustered
on bank. ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: Dealogic Loan Analytics, Bankscope, SNL Financial, International Financial
Statistics, and World Economic Outlook.

This exercise enables us to ask the following counterfactual
question: had Basel III capital regulations been in place before the
global financial crisis, what could excess capital have told us about
loan growth during the crisis? The results are reported in Table 5.
We find that excess capital matters for the transmission of liquid-
ity shocks to loan supply during the crisis, but only when mea-
sured with the TCE ratio (columns 3 and 6), for both crisis periods.
By contrast, excess capital measured with regulatory ratios (Tier 1
and TRC) has a statistically insignificant effect on banks’ ability to
sustain lending in the face of a liquidity shock (columns 1–2 and
4–5). These results are in line with our previous findings on the
level of capital and point to the importance of raising capital stan-
dards on two dimensions—both level and loss-absorption quality—
in safeguarding the flow of corporate loans during financial stress.
4.5. Bank recapitalizations and sovereign risk
The global financial crisis stood out in terms of the scale of gov-
ernment interventions aimed at reinforcing the solvency of bank-
ing systems and supporting economic recovery. Financial sector
rescue measures included large scale deposit guarantees, capital
injections, debt guarantees, purchases of non-performing bank as-
sets, and credit market interventions (such as quantitative easing
programs). Capital injections amounted to more than USD 1.3 bil-
lion between the U.S. subprime crisis and mid-2011 (Brei et al.,
2013). Our baseline results document a relationship between cap-
ital and loan supply for the banks hit by liquidity shocks. The
multi-country dimension of our data allows us ask two related
questions. First, did the link between capital and loan growth dif-
fer across banking systems that received public recapitalizations
compared to banking systems that did not? Second, did govern-
ment solvency interact with these differential effects? Bank recap-
italizations could have reduced the differences in lending behav-
ior for low vs. high-capital banks, putting ex-ante weaker banks
at par with ex-ante stronger banks. In addition, this leveling effect
might depend on government solvency. This is because a relatively
weaker sovereign may have less capacity for current and poten-
tial future bail-outs and may experience a future economic slow-
down. As a result, banks in countries with weaker sovereigns may
respond to a bail-out more cautiously even if they have profitable
lending opportunities.
To explore the above questions, we first interact our key ex-
planatory variable “wholesale funding × capital” with “bail-out,”
an indicator for countries that implemented bank capital injec-
tions during 2008Q4-2010Q1.22 We assembled country-level data
on capital injections and emergency loans to banks starting from
the list of financial sector rescue plans in the BIS Committee of
the Global Financial System (CGFS) “Financial sector rescue plan”
database.23 We cross-checked all entries in this database with on-
line sources including Bloomberg, Factiva, and the news archive of
SNL Financial. Then, we run regressions separately for countries
with high and low sovereign risk, which is proxied by above and
below mean public debt-to-GDP ratio during 2008–2010.
The results for the full sample are shown in Table 6, where
the coefficient on the triple interaction term “wholesale fund-
ing × capital × bail-out” is statistically insignificant at conventional
levels (column 1). For the average country in our sample, bank
bail-outs did not reduce differences in lending behavior of low vs.
high-capital banks. However, this average effect shows heterogene-
ity based on the level of sovereign risk (columns 2–3). Looking at
the triple interaction terms, we find a statistically significant effect
of bail-outs only in the subset of countries with low public debt
22
We consider capital injections into individual banks and injections that were
part of a broader recapitalization programs.
23
We are grateful to BIS staff (Corrinne Ho, Arsim Arslani, Giulia Felba, Elias
Hafner, Nicole Hasler and Reto Hausmann) for developing this database and sharing
the data with us.
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50 45

Table 6
Wholesale funding, capital, and intensive margin of bank lending: Bank recapitalizations and sovereign risk.

(1) (2) (3)

Full sample High sovereign risk Low sovereign risk

Wholesale funding −1.791∗ ∗ ∗ −1.525∗ ∗ −1.938∗ ∗ ∗

(0.521) (0.644) (0.612)
Wholesale funding × Capital 0.116∗ ∗ 0.091 0.123∗
(0.048) (0.069) (0.075)
Capital −3.746∗ −3.754 −3.672
(2.126) (2.958) (5.084)
Wholesale funding × Bail-out 0.311 −0.414 19.758∗ ∗
(0.892) (0.972) (9.371)
Wholesale funding × Capital × Bail-out −0.0 0 0 0.001 −0.026∗ ∗
(0.001) (0.001) (0.012)
Capital × Bail-out −1.347 −4.143 46.015∗
(4.674) (5.285) (23.366)
ROA −8.748 −15.844 −7.378
(8.463) (11.958) (14.656)
NPLs −0.404 −3.233 8.974
(2.903) (3.169) (7.671)
Liquid asset ratio −0.324 −0.395 0.269
(0.414) (0.527) (0.820)
Size (total assets) −0.029∗ ∗ −0.030∗ ∗ −0.051
(0.013) (0.015) (0.037)
Risk profile −0.260 0.013 −0.960
(0.378) (0.501) (0.701)
Borrower country × industry FE Yes Yes Yes
Bank nationality FE Yes Yes Yes
Bank type and specialization FE Yes Yes Yes
Observations 6008 4708 1300
R-squared 0.338 0.314 0.500

This table shows our baseline regressions that link bank wholesale funding and high-quality capital (TCE ratio) to loan supply (intensive margin) as a function of
government assistance programs in the form of bank capital injections, and further to sovereign risk. The dependent variable is the difference in log(total loan
volume) from bank i to borrower country-industry j between the pre-crisis (20 06Q1-20 07Q2) and the global financial crisis (2008Q3-2010Q1). All explanatory
variables except “Bail-out” are measured as of 2007Q2 or 2007Q1 if Q2 data are missing. “Bail-out” takes value 1 for banks in countries that implemented bank
capital injections (either individual bank injections or as part of a broader program) during 2008Q4-2010Q1. In columns 2 and 3 we split the sample based on
the level of public debt in the bank’s country. High/low sovereign risk is defined as above/below mean public debt (% GDP) during 2008–2010. Capital refers to
the TCE ratio. Observations are weighed by the inverse of the number of borrowing country-industries to which each bank lends. Standard errors are clustered
on bank. ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: BIS, Dealogic Loan Analytics, Bankscope, and SNL Financial.

and no such effect in the subset of countries with high public debt.
In our baseline specifications (Table 3, column 3), raising the level
of pre-crisis capital from one standard deviation below the mean
to one standard deviation above the mean (that is, from 2.56% to
11.14%) reduced the negative effect of each percentage point in-
crease in wholesale funding from 1.47% to 0.47%, that is, by a full
percentage point. The coefficient on the triple interaction term in
Table 6 column 3 indicates this gap in the elasticities of lending
with respect to wholesale funding for low vs. high-capital banks
narrows by 17 % in the subset of countries that recapitalized banks
and had low public debt.24, 25 Put differently, within the subset of
countries with strong sovereigns, bank recapitalizations narrowed
the differences in lending behavior between low and high-capital
banks. There is no such effect for the group of countries with high
levels of public debt.26
Thus, we document that differences in the lending response of
ex-ante high vs. low-capital banks continued in the face of pub-
24
A similar albeit smaller effect was documented in Brei et al. (2013) using bank-
level data.
25
Using the coefficient estimates in column 3, raising capital by one stan-
dard deviation from the mean yields 1.938+(0.123-0.026) × (6.85+4.29)=0.85. Re-
ducing capital by one standard deviation from the mean yields 1.938+(0.123-
0.026) × (6.854.29)= 1.68. The difference between the two effects is 0.83 percentage
points, that is, 17 basis points less than the 1 percentage point gap estimated in the
baseline regressions.
26
These results are robust to excluding Eurozone banks from the sample and do
not appear to be driven by economic conditions (such as weak credit demand) that
may correlate with sovereign risk (Table A5).
lic bank recapitalizations, and were partially reduced only for the
countries with low sovereign risk.27
4.6. Liquidity shocks, bank capital, and extensive margin of lending
As discussed previously, the intensive margin of loan adjust-
ment at the country-industry level largely reflects extensive margin
adjustment at the firm level. In this section, we systematically ex-
amine the latter. With this exercise we aim to address two poten-
tial concerns with our intensive margin estimations, namely iden-
tification and measurement error in our data. The first concern is
related to our implementation of the identification strategy, which
rests on the assumption that firms in the same country and in-
dustry face the same credit demand shock. The second concern is
that we use imputed bank-specific loan volumes for some loans,
and if our imputation method assigned loan shares to banks in a
way that systematically varied with unobserved bank characteris-
tics, our coefficient estimates could be confounded by this proce-
dure.
To address these potential concerns, we implement a new em-
pirical approach that uses firm fixed effects to control for firm-
level loan demand and tests for lending adjustment on the ex-
27
Importantly, the protection against wholesale funding shocks of higher bank
capital, be it through higher capital requirements during normal times or bank
bail-outs during banking crises, should be weighed against the real costs of these
actions. The evidence suggests that the fiscal costs of bank bail-outs during bank-
ing crises are significant (see Dungey and Gajurel (2015) and Laeven and Valen-
cia (2013) for analyses). By contrast, the literature suggests that the real costs of
bank capital are not very high. Estimates of the potential rise in the lending rate
associated with one percentage point increase in bank capital lie in the range of
2.5 to 13 bps (see Dagher et al. (2016) and references therein).
46 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50

Table 7
Wholesale funding, capital, and extensive margin of bank lending.

(1) (2) (3) (4)

Global financial crisis U.S. crisis

Wholesale funding −0.0 0 08 −0.0014∗ ∗ −0.0019∗ ∗ −0.0045∗ ∗ ∗

(0.001) (0.001) (0.001) (0.001)
Wholesale funding × Capital 0.0 0 01∗ 0.0 0 05∗ ∗
(0.0 0 0 06) (0.0 0 02)
Capital 0.0357∗ ∗ ∗ 0.0305∗ ∗ ∗ 0.0304∗ ∗ ∗ 0.0098
(0.011) (0.007) (0.011) (0.015)
ROA 0.0564∗ ∗ 0.0552∗ ∗ ∗ 0.0990∗ ∗ ∗ 0.0942∗ ∗ ∗
(0.025) (0.014) (0.023) (0.023)
NPLs 0.0065 0.0053 0.0023 −0.0024
(0.012) (0.005) (0.010) (0.010)
Liquid asset ratio 0.0 0 09 0.0 0 08 0.0027∗ ∗ 0.0023∗ ∗
(0.001) (0.001) (0.001) (0.001)
Size (Log-assets) 0.0341∗ ∗ ∗ 0.0339∗ ∗ ∗ 0.0391∗ ∗ ∗ 0.0380∗ ∗ ∗
(0.009) (0.004) (0.007) (0.007)
Risk profile −0.0015 −0.0016∗ ∗ −0.0012 −0.0015
(0.001) (0.001) (0.001) (0.001)
Borrower (firm) FE Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes
Observations 15,583 15,583 15,597 15,597
R-squared 0.231 0.231 0.236 0.237

This table shows our baseline regressions that link bank balance sheets (wholesale funding and high-quality capital (TCE ratio)) to loan supply (extensive
margin). The dependent variable is the probability of a continued lending relationship between a given firm and bank during the global financial crisis 2008Q3-
2010Q1 (columns 1–2) or the U.S. crisis 2007Q2- 2009Q3 defined in Cornett et al. (2011) (columns 3–4) compared to the pre-crisis period 20 06Q1-20 07Q2.
The capital variable refers to the TCE ratio. All bank variables are measured as of 2007Q2 or 2007Q1 if Q2 data are missing. Standard errors are clustered on
individual borrower (firm). ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: Dealogic Loan Analytics, Dealogic DCM Analytics,
Bankscope, and SNL Financial.

tensive margin. Specifically, we determine if the likelihood that a
firm continues borrowing from any given bank during the global
financial crisis is related to that bank’s pre-crisis financial strength.
The approach avoids the use of potentially misestimated bank-level
loan amounts and achieves identification through the inclusion of
firm fixed effects, which account for credit demand shifts at the
firm rather than the country-industry level. With these fixed ef-
fects, the regressions test whether a given firm borrowing from dif-
ferent banks is more likely to stop obtaining credit from the bank
that was more reliant on wholesale funding before the crisis, and
whether capital dampened this potential negative effect.
Table 7 reports the results from linear probability models es-
timated with OLS. Note that in our baseline Table 3 we had in-
cluded those firm clusters that borrowed both before and after the
shock period from at least two banks. By contrast, in Table 7 col-
umn 2 (N=15,583) we keep all the bank-firm pairs such that there
was a borrowing relationship before the Lehman bankruptcy and
investigate whether this relationship continued or not after that
event. The results show that in this approach, and regardless of
crisis definition, higher pre-crisis wholesale funding is negatively
related to the probability of a continued relationship between a
given bank and a given firm, but a higher TCE ratio reduces this
effect (columns 2, 4). These results highlight the extensive margin
of the bank lending channel of liquidity shock transmission and
reinforce the message that the strength of pre-crisis bank balance
sheets contributed to the decline in credit during the crisis.
5. Robustness checks
We subject the baseline results for the intensive margin of lend-
ing to two sets of robustness tests. The first set of tests aim to
address potential concerns about the causal interpretation of our
results. To this end we show that our results do not capture pre-
crisis loan growth trends that systematically correlate with bank
balance sheet variables and are not driven by correlation of loan
demand shocks with bank exposure to the liquidity shocks. The
second set of tests alleviate potential concerns that the results are
driven by the particular choice of proxy for bank exposure to the
liquidity shocks.
5.1. Potential threats to identification
First, we investigate the validity of a key identifying assump-
tion in the analysis, namely that banks do not differ in their loan
growth prior to the Lehman shock in a way that systematically re-
lates to the interaction between capital and wholesale funding. We
do so by applying a placebo test to loan data two years before the
crisis. The empirical set-up is identical to baseline specifications
except that all crisis dates are moved back by two years to define
placebo crises. As shown in Table 8, our coefficients of interest in
placebo regressions are statistically insignificant and generally have
the opposite sign from the baseline. This result indicates that our
baseline estimates do not capture pre-existing differential trends in
loan growth for banks with varying degrees of bank balance sheet
strength and point towards a causal interpretation of the results.
A second key identifying assumption is that unobserved bor-
rower characteristics, which may be correlated with loan demand,
are orthogonal to bank balance sheet variables such as capi-
tal and wholesale funding. Put differently, borrowers and banks
are randomly matched in the loan market. Following Chodorow-
Reich (2014) and Khwaja and Mian (2008), we probe this “as-good-
as random matching” assumption by re-running the baseline spec-
ifications without borrower country × industry fixed effects and
with several observable borrower characteristics. Borrower vari-
ables include Tobin’s q as a proxy for investment opportunities,
cash holdings, and size (all measured at end-2008).28 The results
are shown in Table 9 where in Panel A we replicate the coeffi-
28
Borrower characteristics include Tobin’s q, cash holdings, and log-assets, which
are averages across the firms within each country-industry cluster. Firm balance
sheet data come from Thomson Reuters Worldscope, a comprehensive data source
for publicly listed firms around the world, with significant coverage of market capi-
talization in advanced and emerging market economies. Given the absence of com-
mon identifiers across datasets, we conduct a manual match of firms in Dealogic
Loan Analytics and Worldscope based on firm name and nationality.
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50 47

Table 8
Placebo test for lending regressions – Two-year lagged sample.

(1) (2) (3) (4)

Placebo Global Financial Crisis Placebo U.S. crisis

Tier 1 ratio TRC ratio TCE ratio TCE ratio

Wholesale funding 1.175 2.266∗ 0.932 -0.581

(0.975) (1.351) (0.646) (0.448)
Wholesale funding × Capital −0.114 −0.178 −0.155 0.064
(0.101) (0.108) (0.100) (0.058)
Capital 5.821 5.922 2.750 −5.636∗ ∗
(4.387) (5.175) (3.956) (2.302)
ROA −4.059 −1.182 0.957 1.232
(11.246) (11.049) (10.934) (5.717)
NPLs −5.526 −5.752 −6.824 −4.037
(5.020) (5.079) (5.116) (2.748)
Liquid asset ratio −0.272 −0.249 −0.566 −0.468
(0.707) (0.691) (0.647) (0.398)
Size (total assets) 0.034 0.029 0.025 0.027
(0.027) (0.026) (0.026) (0.019)
Risk profile −0.241 −0.387 −0.276 0.208
(0.748) (0.723) (0.744) (0.320)
Borrower country × industry FE Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes
Observations 2214 2214 2208 4,926
R-squared 0.492 0.493 0.496 0.281

This table checks that our baseline results are not driven by trends in loan growth that correlate with wholesale funding or its interaction with capital. The
placebo test uses data lagged two years compared to the baseline period. The dependent variable is the difference in log(total loan volume) from bank i to
borrower country-industry j between the placebo pre-crisis and the placebo crisis periods. Placebo crisis dates are defined as 2 years prior to the crisis dates
(specifically, the global financial crisis 2008Q3-2010Q1 and the U.S. crisis 2007Q2- 2009Q3). Correspondingly, bank variables are measured as of 2005Q2 or
2005Q1 (if quarterly data are missing, we use the end-2014 value). Capital refers to the TCE ratio. Observations are weighed by the inverse of the number of
borrowing country-industries to which each bank lends. Standard errors are clustered on bank. ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%.
Data sources: Dealogic Loan Analytics, Bankscope, and SNL Financial.

Table 9
Threats to identification of loan-supply effects: Role of borrower unobserved characteristics.

(1) (2) (3) (4)

Global financial crisis U.S. crisis

Tier 1 ratio TRC ratio TCE ratio TCE ratio

A. Baseline with borrower country × industry FE

Wholesale funding −1.323∗ ∗ −1.486∗ ∗ −1.771∗ ∗ ∗ −1.428∗ ∗ ∗

(0.567) (0.742) (0.426) (0.394)
Wholesale funding × Capital 0.043 0.047 0.117∗ ∗ 0.114∗ ∗ ∗
(0.048) (0.052) (0.046) (0.037)
Borrower country × industry FE Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes
Observations 6030 6030 6008 8328
B. Baseline without borrower country × industry FE,
with country-industry controls
Wholesale funding −1.754∗ ∗ ∗ −1.858∗ ∗ −2.139∗ ∗ ∗ −1.503∗ ∗ ∗
(0.625) (0.834) (0.521) (0.472)
Wholesale funding × Capital 0.059 0.058 0.131∗ ∗ ∗ 0.100∗ ∗
(0.048) (0.056) (0.048) (0.043)
Borrower country × industry FE No No No No
Bank nationality FE Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes
Country-industry control variables Yes Yes Yes Yes
Observations 5826 5826 5805 7991

This table examines the role of borrower unobserved characteristics in affecting the coefficients in the baseline intensive margin regressions. The dependent
variable is the difference in log(total loan volume) from bank i to borrower country-industry j between the pre-crisis (20 06Q1-20 07Q2) and crisis periods
(the global financial crisis (2008Q3-2010Q1) and the U.S. crisis as defined in Cornett et al. (2011) (20 07Q2-20 09Q3)). All bank variables are measured as of
20 07Q2 or 20 07Q1 if Q2 data are missing. In Panel A we replicate the coefficients from Table 3 where the specifications include country × industry fixed
effects as controls for loan demand. In Panel B we show the coefficients from the same regressions but we exclude country × industry fixed effects and instead
include country-industry (borrower) controls such as Tobin’s q (defined as the sum of market capitalization plus debt divided by the book value of assets), cash
holdings, and size (coefficients not shown). Capital refers to the Tier 1 ratio (columns 1–2), TRC ratio (columns 3–4) and TCE ratio (columns 5–8). Tier 1 and
TRC are in % or RWA. Observations are weighed by the inverse of the number of country-industries to which a given bank lends. Standard errors are clustered
on bank. ∗ indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: Dealogic Loan Analytics, Bankscope, SNL Financial, and Thomson Reuters
Worldscope.
48 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50

Table 10
Robustness: Alternative measures of bank exposure to liquidity shocks.

(1) (2) (3) (4)

Global financial crisis U.S. crisis

Short-term funding −1.596∗ ∗ ∗ −1.315∗ ∗ ∗

(0.414) (0.381)
Short-term funding × Capital 0.110∗ ∗ 0.011∗ 0.106∗ ∗ ∗ 0.008∗
(0.046) (0.006) (0.037) (0.005)
Loan-to-deposit ratio −0.269∗ ∗ −0.149∗ ∗
(0.121) (0.072)
Loan-to-deposit ratio × Capital 0.011∗ 0.008∗
(0.006) (0.005)
Capital −3.646∗ ∗ −1.481 −3.625∗ ∗ ∗ −1.645
(1.787) (1.666) (1.302) (1.315)
ROA −8.629 −3.631 −5.004 −1.890
(8.334) (8.750) (6.600) (7.141)
NPLs −0.057 2.591 −1.888 −0.543
(2.609) (2.771) (2.370) (2.346)
Liquid asset ratio −0.264 −0.471 −0.230 −0.380
(0.415) (0.457) (0.348) (0.377)
Size (Total assets) −0.032∗ ∗ −0.046∗ ∗ ∗ −0.017 −0.029∗ ∗
(0.013) (0.013) (0.013) (0.012)
Risk profile −0.219 0.016 −0.032 0.089
(0.365) (0.391) (0.286) (0.293)
Borrower country × industry FE Yes Yes Yes Yes
Bank type and specialization FE Yes Yes Yes Yes
Bank nationality FE Yes Yes Yes Yes
Observations 6008 5993 8328 8305
R-squared 0.337 0.335 0.284 0.283

This table checks the robustness of our results to alternative measures of exposure to liquidity shocks, namely, we replace wholesale funding with short-term
funding (in % of total liabilities) and the loan-to-deposit ratio. The dependent variable is the difference in log(total loan volume) from bank i to borrower
country-industry j between the pre-crisis (20 06Q1-20 07Q2) and crisis periods (the global financial crisis (2008Q3-2010Q1) and the U.S. crisis as defined in
Cornett et al. (2011) (20 07Q2- 20 09Q3)). All bank variables are measured as of 20 07Q2 or 20 07Q1 if Q2 data are missing. Capital refers to the TCE ratio.
Observations are weighed by the inverse of the number of borrowing country-industries to which each bank lends. Standard errors are clustered on bank.
∗
indicates statistical significance at 10%, ∗ ∗ at 5% and ∗ ∗ ∗ at 1%. Data sources: Dealogic Loan Analytics, Bankscope, and SNL Financial.

cients from the regressions in Table 3 on the variables “wholesale 6. Conclusions

funding” and “wholesale funding × capital.” In Panel B we show
the coefficients from the same regressions that exclude borrower
country × industry fixed effects but include borrower controls. Dif-
ferences in coefficient magnitudes across the two panels are in-
dicative of borrower unobservables which may represent a threat
to identification if they were correlated with loan demand. While
the coefficients on “wholesale funding” are somewhat larger in
Panel B, those on the main variable of interest “wholesale fund-
ing × capital” are virtually identical in the two sets of specifica-
tions.
5.2. Other tests
Finally, we explore the robustness of our findings to alternative
proxies for exposure to liquidity shocks. These include short-term
funding in % of total funding (correlation with non-deposit fund-
ing ratio of 0.78) and the loans-to-deposits ratio (correlation of
0.50). Coefficient estimates for the baseline specifications employ-
ing these alternative shock-exposure measures suggest this partic-
ular choice does not drive our results (Table 10).29
29
Additional results are shown in the Online Appendix. For instance, we show
that controlling for loan portfolio composition (mortgage loans, commercial loans,
and consumer loans) leaves our intensive margin lending results unchanged, sug-
gesting they are not driven by disruptions in loan markets to which banks may
have been building wholesale-funding exposures before the financial crisis (Table
A6). The main results are also robust to controlling for the growth of other types
of credit in the banks’ loan portfolios (proxied by total loan growth), an indicator
for domestic lending, and additional measures of asset quality such as NPLs and
LLRs (Table A7). Finally, we explore the real effects of liquidity shocks and bank
capital and show that firms in country-industry clusters that were borrowing from
banks with higher ex-ante exposure to liquidity shocks subsequently had lower as-
set growth, sales growth, and investment ratios; and that these effects were weaker
for firms linked to better-capitalized banks (Table A8).
We exploit the liquidity shocks generated by the U.S. subprime
crisis of 20 07–20 08 to examine the role of bank financial strength,
in particular that of the quantity and quality of capital, in the
transmission of financial shocks to the real economy. Our data cov-
ers a large international sample of banks and firms. We contribute
to the literature a systematic examination of alternative measures
of capital, including standard regulatory ratios, tangible common
equity, and a measure of excess capital that speaks to the counter-
cyclical capital buffer framework of Basel III.
We document that banks that relied more heavily on wholesale
funding, and hence were more vulnerable to financial market tur-
moil, reduced the supply of corporate loans more than other banks.
However, bank capital played a cushioning role: better-capitalized
banks reduced lending less than thinly-capitalized banks which
had the same level of exposure to the liquidity shocks. Bank capi-
tal as measured by the tangible common equity ratio, which comes
close to Basel III’s leverage ratio, acted as a buffer. By contrast,
bank capital as measured by standard Basel II regulatory ratios is
less useful for discerning banks’ ability to sustain lending in the
face of liquidity shocks. Exploiting the cross-country nature of our
data, we also show that public capital injections narrowed the gap
between the loan growth of high vs. low-capital banks, but only in
the subset countries with low public debt.
Our results speak directly to Disyatat (2011)’s re-interpretation
of the traditional bank lending channel in modern financial sys-
tems, in which banks rely more heavily on market-based funding.
In his framework, the bank lending channel works mainly through
the impact of monetary policy on bank balance sheet strength.
Disyatat (2011) shows that for banks with capital above a thresh-
old, small negative shocks to asset values are fully absorbed in the
system and are not passed on to the real economy through reduced
lending. Below that critical level, the same shock leads to a reduc-
 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50
tion in the equilibrium volume of lending. In this framework, as
in our analysis, banks can act either as amplifiers or absorbers of
financial sector shocks, depending on their financial health.
Acknowledgement
We are thankful for constructive suggestions from the Associate
Editor and three anonymous referees, and useful comments from
and discussions with Charles Calomiris, Stijn Claessens, Giovanni
Dell’Ariccia, Enzo Dia, Xavier Freixas, Gaston Gelos, Iftekhar Hasan,
Neeltje van Horen, Sujit Kapadia, Josef Korte, Luc Laeven, Hitoshi
Mio, Lev Ratnovski, Enrico Sette, Jerome Vandenbussche, Chen
Zhou, and seminar participants at the Bank of England, Cleveland
Fed, Central Bank of Ireland, International Monetary Fund, 44th
Annual Money, Macro and Finance Conference, Macroeconomic and
Financial Vulnerability Indicators in Advanced Economies Confer-
ence, Bundesbank Conference “The Stability of the European Fi-
nancial System and the Real Economy in the Shadow of the Cri-
sis,” FEBS/LabEx-ReFi 3rd Conference of the Financial Engineering
and Banking Society, the 11th INFINITI Conference on International
Finance, 40th EFA Annual Conference, the 5th EBC-CEPR Finan-
cial Stability Conference “The Regulatory Framework of the Future,”
and the 2017 Oxford IFABS conference. Keith Miao provided excel-
lent research assistance. This is a significantly revised version of
a paper previous circulated with the title “Balance sheet strength
and bank lending during the global financial crisis” (IMF Working
Paper No. 13–102). Camelia Minoiu is grateful to the Wharton Fi-
nancial Institutions Center and the Management Department at the
Wharton School of the University of Pennsylvania for their host-
ing during revisions to this paper. The views expressed herein are
those of the authors and do not necessarily reflect those of the IMF
or IMF policies.
Supplementary material
Supplementary material associated with this article can be
found, in the online version, at doi:10.1016/j.jbankfin.2018.04.011.
References
Acharya, V., Engle, R., Pierret, D., 2014. Testing macroprudential stress tests: the risk
of regulatory risk weights. J. Monet. Econ. 65, 36–53.
Acharya, V. V., Eisert, T., Eufinger, C., Hirsch, C. W., 2016. Real effects of the sovereign
debt crisis in Europe: evidence from syndicated loans. New York University -
Leonard N. Stern School of Business. Unpublished manuscript. Available at http:
//dx.doi.org/10.2139/ssrn.2612855.
Acharya, V. V., Gujral, I., Kulkarni, N., Shin, H. S., 2011. Dividends and bank capi-
tal in the financial crisis of 20 07–20 09. National Bureau of Economic Research
Working Paper No. 16896.
Acharya, V.V., Mehran, H., Thakor, A., 2015. Caught between Scylla and Charybdis?
regulating bank leverage when there is rent seeking and risk shifting. Rev. Corp.
Financ. Stud. doi:10.1093/rcfs/cfv006.
Admati, A.R., 2016. The missed opportunity and challenge of capital regulation. Natl.
Inst. Econ. Rev. 235 (1), R4–R14.
Aiyar, S., 2012. From financial crisis to great recession: the role of globalized banks.
Am. Econ. Rev. 102 (3), 225–230.
Aiyar, S., Calomiris, C.W., Hooley, J., Korniyenko, Y., Wieladek, T., 2014. The inter-
national transmission of bank capital requirements: evidence from the UK. J.
Financ. Econ. 113 (3), 368–382.
Aiyar, S., Calomiris, C.W., Wieladek, T., 2014. Does macro-Prudential regulation leak?
Evidence from a UK policy experiment. J. Money Credit Bank. 46 (s1), 181–214.
Alessandri, P., Bologna, P., Fiori, R., Sette, E., 2015. A note on the implementation
of the counter cyclical capital buffer in italy. Bank of Italy Occasional Paper No.
278(278).
Allen, F., Hryckiewicz, A., Kowalewski, O., Tumer-Alkan, G., 2014. Transmission of
bank liquidity shocks in loan and deposit markets: the role of interbank bor-
rowing and market monitoring. J. Financ. Stab. 15, 10–28.
Amiti, M., Weinstein, D.E., 2018. How much do bank shocks affect investment? Evi-
dence from matched bank-firm loan data. J. Polit. Econ. 126 (2), 525–587.
Antoniades, A., 2016. Liquidity risk and the credit crunch of 20 07–20 08: evidence
from micro-Level data on mortgage loan applications. J. Financ. Quant. Anal. 51
(6), 1795–1822. doi:10.1017/S0022109016000740.
Auer, R., Ongena, S., 2016. The countercyclical capital buffer and the composition of
bank lending. BIS Working Paper. Bank of International Settlements.
49
BCBS, 2010. An Assessment of the Long-Term Economic Impact of Stronger Capital
and Liquidity Requirements. Basel, Switzerland: Basel Committee on Banking
Supervision.
BCBS, 2010. Basel III: International Framework for Liquidity Risk Measurement, Stan-
dards and Monitoring. Basel, Switzerland: Basel Committee on Banking Super-
vision.
BCBS, 2011. Basel III: A Global Regulatory Framework for More Resilient Banks and
Banking Systems. Basel, Switzerland: Basel Committee on Banking Supervision.
Beltratti, A., Stulz, R.M., 2012. The credit crisis around the globe: why did some
banks perform better? J. Financ. Econ. 105 (1), 1–17.
Berger, A.N., Bouwman, C.H., 2013. How does capital affect bank performance during
financial crises? J. Financ. Econ. 109 (1), 146–176.
Bernanke, B.S., 2007. The financial accelerator and the credit channel. In: Proceed-
ings of the Speech delivered at The Credit Channel of Monetary Policy in the
Twenty-first Century Conference, Federal Reserve Bank of Atlanta. Atlanta, GA,
June 15.
Bernanke, B.S., Blinder, A.S., 1988. Credit, money, and aggregate demand. Am. Econ.
Rev. 82, 901–921.
Bernanke, B.S., Gertler, M., 1995. Inside the black box: the credit channel of mone-
tary policy transmission. J. Econ. Perspect. 9, 27–48.
Berrospide, J.M., Edge, R.M., 2010. The effects of bank capital on lending: what do
we know, and what does it mean? J. Int. Central Bank. 6, 187–204.
Bofondi, M., Carpinelli, L., Sette, E., 2017. Credit supply during a sovereign debt cri-
sis. J. Eur. Econ. Assoc. jvx020. doi:10.1093/jeea/jvx020.
Bottero, M., Lenzu, S., Mezzanotti, F., 2016. Sovereign debt exposure and the bank
lending channel: impact on credit supply and the real economy. Bank of Italy
Working Paper No. 1032 (Rome: Bank of Italy).
Brei, M., Gambacorta, L., Von Peter, G., 2013. Rescue packages and bank lending. J.
Bank. Financ. 37 (2), 490–505.
Buch, C.M., Prieto, E., 2014. Do better capitalized banks lend less? Long-Run panel
evidence from germany. Int. Financ. 17 (1), 1–23.
Carlson, M., Shan, H., Warusawitharana, M., 2013. Capital ratios and bank lending: a
matched bank approach. J. Financ. Int. 22 (4), 663–687.
Cerutti, E., Hale, G., Minoiu, C., 2015. Financial crises and the composition of
cross-border lending. J. Int. Money Financ. 52, 60–81.
Cetorelli, N., Goldberg, L., 2011. Global banks and international shock transmission:
evidence from the crisis. IMF Econ. Rev. 59, 41–76.
Chodorow-Reich, G., 2014. The employment effects of credit market disruptions: fir-
m-level evidence from the 2008–9 financial crisis. Q. J. Econ. 129 (1), 1–59.
Cornett, M.M., McNutt, J.J., Strahan, P.E., Tehranian, H., 2011. Liquidity risk man-
agement and credit supply in the financial crisis. J Financ. Econ. 101 (2), 297–
312.
Correa, R., Sapriza, H., Zlate, A., 2016. Liquidity shocks, dollar funding costs, and
the bank lending channel during the european sovereign crisis. Boston Fed RPA,
Working Paper 16-04.
Dagher, J., Dell’Ariccia, G., Laeven, L., Ratnovski, L., Tong, H., 2016. Benefits and Costs
of Bank Capital. International Monetary Fund, Washington, D.C.. Staff Discussion
Note 16/04
Dagher, J., Kazimov, K., 2015. Banks’ Liability structure and mortgage lending during
the financial crisis. J. Financ. Econ. 116 (3), 565–582.
De Haas, R., Van Horen, N., 2012. International shock transmission after the Lehman
brothers collapse: evidence from syndicated lending. Am. Econ. Rev. 102 (3),
231–237.
De Haas, R., Van Horen, N., 2013. Running for the exit? International bank lending
during a financial crisis. Rev. Financ. Stud. 26 (1), 244–285.
Di Patti, E.B., Sette, E., 2016. Did the securitization market freeze affect bank lending
during the financial crisis? Evidence from a credit register. J. Financ. Int. 25,
54–76.
Disyatat, P., 2011. The bank lending channel revisited. J. Money Credit Bank. 43 (4),
711–734.
Dungey, M., Gajurel, D., 2015. Contagion and banking crisis–International evidence
for 20 07–20 09. J. Bank. Financ. 60, 271–283.
Gambacorta, L., 2005. Inside the bank lending channel. Eur. Econ. Rev. 49 (7),
1737–1759.
Gambacorta, L., Mistrulli, P.E., 2004. Does bank capital affect lending behavior? J.
Financ. Int. 13 (4), 436–457.
Giannetti, M., Laeven, L., 2012. The flight home effect: evidence from the syndicated
loan market during financial crises. J. Financ. Econ. 104(1), 23–43.
Giannetti, M., Laeven, L., 2012. Flight home, flight abroad, and international credit
cycles. Am. Econ. Rev. 102(3), 219–224.
Gong, D., Huizinga, H., Laeven, L., et al., 2015. Nonconsolidated subsidiaries, bank
capitalization and risk taking. CEPR Discussion Paper No. 10992.
Haldane, A.G., Madouros, V., 2012. The dog and the frisbee. Revista de Economía
Institucional 14 (27), 13–56.
Holmstrom, B., Tirole, J., 1997. Financial intermediation, loanable funds, and the real
sector. Q. J. Econ. 663–691.
Huang, R., Ratnovski, L., 2011. The dark side of bank wholesale funding. J. Financ.
Int. 20 (2), 248–263.
IMF, 2009. What constitutes systemic risk? Global Financial Stability Report (Chap-
ter 3). International Monetary Fund, Washington, D.C..
IMF, 2012. Global prospects and policies. World Economic Outlook (Chapter 1). In-
ternational Monetary Fund, Washington, D.C.
Ivashina, V., Scharfstein, D.S., 2010. Bank lending during the financial crisis of 2008.
J. Financ. Econ. 97 (3), 319–338.
Ivashina, V., Scharfstein, D.S., Stein, J.C., 2015. Dollar funding and the lending behav-
ior of global banks. Q. J. Econ. 130(3), 1241–1281.
50 T. Kapan, C. Minoiu / Journal of Banking and Finance 92 (2018) 35–50
Iyer, R., Peydro, J.-L., da Rocha-Lopes, S., Schoar, A., 2014. Interbank liquidity crunch
and the firm credit crunch: evidence from the 20 07–20 09 crisis. Rev. Econ. Stud.
27, 347–372.
Jiménez, G., Ongena, S., Peydró, J., Saurina, J., 2012. Credit supply and monetary
policy: identifying the bank-balance sheet channel with loan applications. Am.
Econ. Rev. 102 (5), 2121–2165.
Jiménez, G., Ongena, S., Peydro, J.-L., Saurina Salas, J., 2014. Credit demand forever?
On the strengths of bank and firm balance-Sheet channels in good and crisis
times. European Banking Center Discussion Paper No. 2012-003, CentER Discus-
sion Paper Series No. 2012-005.
Kapan, T., Minoiu, C., 2014. Liquidity shocks and the supply of credit after the
20 07–20 08 crisis. Int. J. Financ. Econ. 19 (1), 12–23.
Kashyap, A.K., Stein, J.C., 20 0 0. What do a million observations on banks say about
the transmission of monetary policy? Am. Econ. Rev. 20 (3), 407–428.
Khwaja, A.I., Mian, A., 2008. Tracing the impact of bank liquidity shocks: evidence
from an emerging market. Am. Econ. Rev. 98 (4), 1413–1442. doi:10.1257/aer.98.
4.1413.
Kishan, R.P., Opiela, T.P., 20 0 0. Bank size, bank capital, and the bank lending chan-
nel. J. Money Credit Bank. 121–141.
Laeven, L., Valencia, F., 2013. Systemic banking crises database. IMF Econ. Rev. 61,
225–270.
Mariathasan, M., Merrouche, O., 2014. The manipulation of basel risk-weights. J. Fi-
nanc. Int. 23 (3), 300–321.
Martynova, N., 2015. Effect of bank capital requirements on economic growth: a
survey. De Nederlandsche Bank Working Paper No. 467.
Mayes, D. G., Stremmel, H., 2014. The effectiveness of capital adequacy measures in
predicting bank distress. SUERF Study No. 2014/1.
Peek, J., Rosengren, E.S., 1995. Bank lending and the transmission of monetary pol-
icy. In: Conference series-Federal Reserve Bank of Boston, 39. Federal Reserve
Bank of Boston, Boston, MA, pp. 47–68.
Plosser, M. C., Santos, J. A., 2014. Banks’ Incentives and the quality of internal risk
models. FRB of New York Staff Report No. 704, New York, N.Y.: Federal Reserve
Bank of New York.
Popov, A., Van Horen, N., 2015. The impact of sovereign debt exposure on bank
lending: evidence from the european debt crisis. Rev. Financ. 19(5), 1825–1866.
Puri, M., Rocholl, J., Steffen, S., 2011. Global retail lending in the aftermath of the US
financial crisis: distinguishing between supply and demand effects. J. Financ.
Econ. 100 (3), 556–578.
Schnabl, P., 2012. The international transmission of bank liquidity shocks: evidence
from an emerging market. J. Financ. 67 (3), 897–932.
Shin, H.S., 2016. Bank capital and monetary policy transmission. In: Proceedings of
the Panel Remarks at “The ECB and its Watchers” XVII Conference. Frankfurt,
April 7.
Stein, J.C., 1998. An adverse selection model of bank asset and liability management
with implications for the transmission of monetary policy. RAND J. Econ. 29(3),
466–486.
Van den Heuvel, S., 2002. Does bank capital matter for monetary transmission?
Econ. Policy Rev. 8 (1), 259–265.
Van den Heuvel, S., 2012. Banking conditions and the effects of monetary policy:
evidence from US states. BE J. Macroecon. 12 (2), 1–31.
Woo, D., 2003. In search of capital crunch: supply factors behind the credit slow-
down in japan. J. Money Credit Bank. 35 (6), 1019–1038.