Impact of Bank Capital and Monetary policy on Lending Behavior of USA Banking Sector Before and After Global Financial Crises

This study investigates the impact of bank capital, capital structure and monetary policy on the lending behavior of USA banks before and after global financial crises. For this purpose, sample data is collected from the annual reports of top ten banks of USA from 2001 to 2017. A panel unit root is applied to check the stationarity of variables. In order to explain the impact of bank capital, capital structure and monetary policy on lending behavior of USA banks, fixed effect and random effect model have been used. The sample data has been divided into two sets. First data set is taken from 2001 to 2008 before financial crises. Second data set is taken from 2009 to 2017 after financial crises and all above tests have been applied on these data sets. Furthermore, in order to measure the lending behavior three types of lending have been selected lending to consumers, lending to real estate and lending to commercial & industrial sector of USA banks. In order to get the better picture of lending behavior of USA banks before and after financial crises: paired sample T-test has been applied on the data of lending before and after financial crises. Results of paired sample T-test showed there is significant difference in lending to consumers, lending to commercial & industrial sector and lending to real estate before and after financial crises of USA banks because of the implementation of Basel III. So, we accept the alternative hypothesis for our second research question. Findings suggested that impact of bank capital, capital structure and monetary policy has significant impact on the lending behavior before and after the global financial crises with the positive change of sixteen percent in R-squared value. So, we accept the alternative hypothesis for our first research question. The results of coefficients shows that before financial crises (2001 to 2008) discounted interest rates have more significant impact on the lending made to consumers but after the global financial crises (2009 to 2017) discounted interest rates, capital structure and tier 1 capital ratio have more significant impact on the loan made to consumers. The results of coefficients shows that before the financial crises (2001 to 2008) discounted interest rates have more significant impact on the loan made to commercial and industrial sector but after the global financial crises (2009 to 2017) discounted interest rates, capital structure and tier 1 capital ratio have more significant impact on the loan made to commercial and industrial sector. The results of coefficients shows that before financial crises (2001 to 2008) discounted interest rates have more significant impact on the loan made to real estate but after the global financial crises (2009 to 2017) discounted interest rates and capital structure have more significant impact on the loan made to real estate. Findings of our study are aligned with Swamy (2015), who investigated the impact of bank capital on lending spreads and found that increase in capital ratio of banks would also increase their lending spreads. Our results are also matched with the findings of (Kosak et al., 2015), those concluded that capital structure significantly affect the loan growth of banks. Our results are also aligned with Chami & Cosimano (2010), they found that change in monetary policy due to Basel Accord would lead to a change in bank capital and bank loans. Keyword: Bank capital, Capital structure, Monetary Policy, Lending behavior, Basel accord, Basel III. Banks are the financial institutions those deal in money and credit. Lending is a key function of the banks as when the first time in 1800 BC (in Babylon) the idea of banks began firstly, the moneylender made loans to the people. Bank health is closely related to lending activity. As providing loans are the way of banks to make money it is important to know about the elements that can have the direct impact on the lending behavior of the banks. This paper investigates the impact of bank capital, capital structure and monetary policy on lending behavior of banks. In past, many studies have been conducted on the bank capital and their lending behavior in many countries. But the researcher didn’t find a study which investigated the impact of bank capital and the both capital structure and monetary policy on the lending behavior of USA banks before and after financial crises. Furthermore, this is the first study in which researcher did a comparative analysis of these 12 School of Accountancy and Finance, The University of Lahore, Pakistan. Corresponding author: chabdullahsahi@yahoo.com variables before and after financial crises due to the change in Basel Accord. Monetary policy has strongest impact on the lending behavior of the banks. It is enacted by the central banks that manage the money supply in an economy. The main purposes of this policy are to control inflation rate (between 2% to 2.5%), reduce unemployment (below 6.5%) and to promote long term interest rates. And the Federal Reserve’s main purpose of enactive the monetary policy is to maintain the healthy economy growth that the 2% to 3% increase in the nation’s gross domestic product. Monetary policy creates incentives for banks to loan and businesses to borrow. By monetary policy Federal Reserve regulations decides the growth of commercial banking industry. As it has major influence on the market interest rates, thereby affecting profit of the banks. Bank capital represents the value of a bank’s equity instruments that can absorb losses and it also helps the bank in times of