In a recent study from the Bank for International Settlements, Leonardo Gambacorta and HyunSong Shin (2016) document that bank capitalization has a strong effect on bank loan supply: a one percentage point increase in a bank’s equity-to-total assets ratio is associated with a 0.6 percentage point increase in its yearly loan growth.
In fact, if a banking system remains systematically undercapitalized and new lending is not kept under a tight supervisory watch, then the economy can suffer significantly from a credit misallocation problem, now commonly known as ‘loan ever-greening’ or ‘zombie lending’.