Bank Capital and Lending: Evidence from Syndicated Loans

Using within-loan estimations to remove the impact of demand-side factors, we find that the capital levels of banks participating in the same syndicated loan are positively associated with the banks’ contributions to the loan. Consistent with the argument that higher capital reduces the cost of uninsured debt, the positive effect of bank capital on lending is stronger among banks that rely more on wholesale funding. Furthermore, we find that banks increase their contributions to syndicated loans after receiving Troubled Asset Relief Program (TARP) funding. Taken together, we provide new evidence on the importance and causal effect of bank capital on lending.