Bank capital and lending: An analysis of commercial banks in the United States

•We study the relationship between capital ratios and business lending.•Propose a new identification strategy to deal with common endogeneity problems.•We find a moderately positive and significant relationship.•Bigger banks show a stronger relationship than the smaller banks.•Low capitalized banks show a stronger relationship than the well capitalized banks.

We evaluate the relationship between capital ratios and business lending of commercial banks in the United States. Using two different measures of capital, we find a moderate relationship between capital ratios and business lending. We also propose an innovative instrumenting technique to overcome common endogeneity problems.