The Impact of Liquidity on the Connection between Bank Capital and Lending: Example of Russia

The bank capital channel is one of the most important links between the financial market and the real sector of the economy that has ever confirmed the crisis of 2008. When the global economy experienced a credit squeeze caused by the bank's inability to issue loans due to capitalization problems, which led to a more problematic end of the crisis. The decline in key financial indicators caused by the crisis occurs in almost all countries with developed and developing economies, including in Russia. Despite the increase in non-bank financial resources, this is a continuation of the financial sector. The main channel through which financial shocks affect the real sector of the economy is the bank's capital channel. With a decrease in the capitalization of banks or with increasing requirements for capital adequacy, banks need to either increase their own capital. The bodies regulating banking activities are facing a choice between bank stabilization and economic growth. This choice is most often encountered in a crisis, and at the same time it has a negative impact on the banking system and reduces the growth rate of the economy. Our study showed a positive relationship between the capitalization of the bank and lending. This indicates the working capacity of the channel of bank capital in Russia. This study also showed the positive impact of liquidity on the relationship between the capitalization of the bank and lending to Russian data. This confirms the basic hypothesis that banks primarily address the liquidity problem, and then use capital increase to increase the volume of lending. Also, this paper shows the different influence of capital and liquidity on lending for different groups of banks, both in size and in the main line of business.