Effects of Bank Capital and Lending on Leverage, Risk, and Growth of Nonfinancial Firms

This paper examines the impact of bank capital on the capital structure of nonfinancial firms, focusing on lenders and commercial borrowers from 2000 to 2019. We find a positive relationship between firm leverage and bank capital, with lending serving as a key channel for this effect. Additionally, increased lending is associated with higher firm risk and slower growth. Our deal-level analysis reveals consistent findings with those at the firm level: greater lending is linked to higher spreads, more tranches, more secured loans, fewer lenders per deal, and longer maturities, all of which indicate increased borrower risk. This study offers new insights into how bank capital structure policies influence the financial structure of nonfinancial firms and contributes to the broader debate on the spillover effects of risk-reduction measures in the financial sector, such as capital regulation, on the real economy.