Bank Capital and Loan Liquidity

Bank capital is an important determinant of secondary market liquidity of loans that a bank originates and syndicates. Higher bank capital is associated with significantly narrower loan bid-ask spreads. This effect is stronger when banks are subject to more external financing frictions and during the 2007:Q3 – 2009:Q4 financial crisis. Tests using exogenous shocks to bank capital generated by housing market exposures and the 2012 JPMorgan ‘London Whale’ incident are suggestive of causality. Our paper contributes to the research and policy debates on the efficacy of bank capital, and sheds new light on the link between intermediary capital and asset liquidity.