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The Effects of Bank Capital on Bank Credit Creation
Panel Evidence from Austria
Credit and Capital Markets – Kredit und Kapital, Vol. 38 (2005), Iss. 1 : pp. 117–129
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Franz R. Hahn, Vienna
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Abstract
This paper is aimed to assess the impact of risk-weighted bank capital on credit growth in Austria for the period from 1996 to 2000 by using a panel-econometric approach. For this purpose, we use a sample consisting of a balanced panel of annual report data from 1996 to 2000 for 750 Austrian universal banks. To disentangle the impact of bank capital from other effects we control for impacts caused by supply-side and demand-side variables such as the commercial loan rate, aggregate output gap and the collateral value of real estate, respectively. The estimates show that bank capital holding as a percentage of risk-weighted assets according to Basel I has a negative impact on bank credit creation in Austria. Thus the paper provides evidence that risk-based bank capital may work as a binding constraint on liquidity and bank credit creation. This is a remarkable result against the backdrop of the ongoing overhaul of the Basel Accord. (JEL C23, E51, G21, N20)