Why bank capital matters for monetary policy

One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank's funding cost and its lending growth. In a cross-country bank-level study, we find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a 4 basis point reduction in the cost of debt financing and with a 0.6 percentage point increase in annual loan growth.

JEL classification: E44, E51, E52

Keywords: Bank capital, book equity, monetary transmission mechanisms, funding, bank lending