Do better-capitalized banks lend less? Evidence from European banks

We examine the link between bank capital and earning assets in five European countries during 1989-2012 using panel cointegration techniques. We find that higher bank capital is associated with a higher volume of earning assets, including bank loans. However, we also find some evidence that bank capitalization would impact negatively on the growth of bank lending at capital-to-asset ratios above 15%, which is below the ratio mandated for some UK-headquartered banks in the UK's 2013 Bank Reform Act.