1. THE ASYMMETRIC CYCLICAL EFFECTS OF BANK CAPITAL ON BANK LENDING

This paper investigates the cyclical effects of bank capital on bank lending growth during the period between July 2005 and September 2010 for the banking industries in six CIS countries including Kazakhstan, Russia, Belarus, Armenia, Ukraine, and Azerbaijan. We find that the bank capital has significant pro-cyclical effect (negative relationship) on lending only during economic downturn while no meaningful effect during economic upturn. The monthly observations of the growth rates on deposit, foreign borrowing, and capital are analyzed in the panel study framework to see if they have any impacts on lending growth. Also, the lending rate was included in the analysis to control possible credit rationing effect during liquidity squeeze period due to increased degree of the adverse selection problem in the market. We find that the growth rate of capital has significant negative impacts on the growth of bank lending during the period of international liquidity squeeze, exacerbating the financial turmoil that started in the second half of 2007 in Kazakhstan and the third quarter of 2008 or early 2009 for other countries. When the availability of international liquidity is growing or already abundant, however, the capital does not show significant impact on lending growth with mixed signs in lags. This asymmetry might reflect the excessive regulatory capital requirement and/or accumulation of capital buffer beyond optimum to prepare for the increased degree of liquidity and credit risks during the international liquidity dry-up period. This finding is consistent with the recent concern on the pro-cyclicality of bank capital regulation on bank lending during economic downturn. However, we do not find the similar negative relationship between capital and lending during the period with relatively affluent international liquidity in the earlier period for these countries. In addition, deposit growth also exerted an asymmetric impact on lending growth, showing positive relationship during the period of affluent international liquidity while no relationship during the period of liquidity dry-up. Therefore, the pro-cyclicality issue might have been more pronounced in the liquidity squeeze period than normal times in these countries.