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Capital requirements and bank behavior in the UK: Are there lessons for international capital standards?

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  • Francis, William B.
  • Osborne, Matthew

Abstract

The financial crisis prompted widespread interest in developing a better understanding of how capital regulation drives bank behavior. This paper uses a unique, comprehensive database of regulatory capital requirements on all UK banks to examine their effects on capital, lending and balance sheet management behavior. We find that capital requirements that include firm-specific, time-varying add-ons set by supervisors affect banks’ desired capital ratios and that resulting adjustments to capital and lending depend on the gap between actual and target ratios. We use these results to measure the effects of a capital regime that includes features similar to those embedded in the UK framework. Our results suggest that countercyclical capital requirements may be less effective in slowing credit activity when banks can readily satisfy them with lower-quality (lower-costing) capital elements versus higher-quality common equity. Given the size of the UK banking sector and the global nature of many of the largest institutions in the UK banking sector, the results have implications for the ongoing debate surrounding the design and calibration of international capital standards.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 3 ()
Pages: 803-816

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:3:p:803-816

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Bank capital channel; Regulatory capital requirements; Bank capital ratios; Bank credit supply; Countercyclical capital policy; Macroprudential tools;

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References

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Citations

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Cited by:
  1. Jean-Stéphane Mésonnier & Dalibor Stevanovic, 2013. "Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment," Cahiers de recherche, CIRPEE 1330, CIRPEE.
  2. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
  3. Diana Bonfim & Nuno Monteiro, 2013. "The implementation of the countercyclical capital buffer: rules versus discretion," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  4. Abdul Wahab, Hishamuddin & Rosly, Saiful Azhar & Masih, Abul Mansur M., 2014. "Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators," MPRA Paper 56975, University Library of Munich, Germany.
  5. Casselmann, Farina, 2013. "Financial services regulation in the wake of the crisis: The Capital Requirements Directive IV and the Capital Requirements Regulation," IPE Working Papers 18/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
  6. Shim, Jeungbo, 2013. "Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(3), pages 761-772.
  7. Kok, Christoffer & Schepens, Glenn, 2013. "Bank reactions after capital shortfalls," Working Paper Series, European Central Bank 1611, European Central Bank.

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