Quality of Bank Capital and Bank Lending Behavior During the Global Financial Crisis

Using a worldwide bank sample from 2000 to 2010, this article analyzes the determinants of bank lending behavior during the global financial crisis highlighting the role of bank capital. It reveals that the high quality of the bank funding strategy (tier 1 bank capital and retail deposits) and prevalent government backing were crucial to continuous bank lending during the crisis period. This effect was especially pronounced in non-OECD and BRIC countries. We also point out that, although higher use of tier 2 capital and interbank deposits could be important for increased lending during a normal period, this did not support lending activities during the financial crisis. The article concludes by suggesting that in crisis periods high-quality bank capital is a bank's competitive strength.