How Does Post-Crisis Bank Capital Adequacy Affect Firm Investment?

We examine the effect of bank capital levels on firm investment drawing on a sample of11,106 non-financial firms from 2007 to 2013 in 16 advanced economies. We examine twomeasures of bank capital adequacy, the Tier 1 ratio and a simple leverage ratio, and find thatfirms with larger external financial needs invest relatively more when domestic financialsystems have relatively high leverage ratios. This pattern is more pronounced for those firmsthat have sound fundamentals, suggesting that bank balance sheets and their willingness toextend credit can be an important factor in determining aggregate investment and growthoutcomes. The empirical findings are robust to a range of specifications. Bank Tier 1 capitalratio does not appear to have a significant effect on corporate investment, possibly because ahigher Tier 1 ratio also captures a high share of assets with low risk weights.