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The bank capital channel and bank profits
Author(s) -
Orzechowski Paul E.
Publication year - 2019
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1054
Subject(s) - economics , bank rate , monetary economics , financial fragility , earnings , loan , capital requirement , official cash rate , capital (architecture) , capital adequacy ratio , financial system , finance , macroeconomics , monetary policy , central bank , microeconomics , financial crisis , incentive , history , archaeology
This paper develops a microeconomic model of banking to highlight an endogenous loan creation process that emerges from bank profits via the capital accumulation of retained earnings and uses a simple bank capital‐loan multiplier to illustrate constraints on lending. The study also analyzes how sufficient net interest margins are important for banks to maintain lending portfolios and avoid financial fragility. The model offers support to bank capital channel ( BKC ) economists by illustrating how changes in interest rates may influence bank lending through the bank's internal capital accumulation growth rate and on a bank's portfolio choices.