The Effect of Bank Investment on Lending. Does Capital-Adequacy Matter?

In Basel III regulations, high risk coefficients are considered for banks investments. In terms of capital adequacy restrictions, the regulations state that if a bank makes a major investment in the non-financial sector, it must deduct the same amount of capital. This study examines the effect of banks' investment on borrowing by considering the role of capital adequacy, and also the impact that it can have on this relationship. To conduct this research, the data of 18 ranian private banks that were active in the period of 1396-1387 were used, which were investigated by panel data method and dynamic regression method (GMM). To achieve more accurate results, the model was estimated in three groups: private banks, privatized banks, and total banks. The results showed that the capital adequacy has a positive effect but the amount of investment of banks has a negative effect on their debt. Based on the results, we can say if banks can have a suitable capital adequacy ratio(at least 8%) then not only the effect of investment on lending is not negative but also by increase in investment banks can increase their lending.