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Bank Capital and Lending: Evidence from Syndicated Loans

  • Yongqiang Chu, Donghang Zhang and Yijia (Eddie) Zhao

Abstract

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.

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Corresponding author

*Chu, yongqiang.chu@uncc.edu, University of North Carolina at Charlotte Belk College of Business; Zhang (corresponding author), zhang@moore.sc.edu, University of South Carolina Moore School of Business; and Zhao, yijia.zhao@umb.edu, University of Massachusetts Boston College of Management.

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We thank an anonymous referee and Jarrad Harford (the editor) for many insightful suggestions that have greatly improved the paper. We also thank Allen Berger, Greg Niehaus, Enrico Onali, and seminar participants at the University of Massachusetts Boston, the 2014 Financial Management Association Annual Meeting, and the 2016 China International Conference in Finance (CICF) for their comments, and Allen Berger and Raluca Roman for sharing their data on the Troubled Asset Relief Program (TARP). Chu and Zhang acknowledge the financial support of the Moore School Research Grant Program.

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