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Shocks to bank capital: evidence from UK banks at home and away

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  • Nada Mora
  • Andrew Logan

Abstract

This article assesses how shocks to bank capital may influence a bank's portfolio behaviour using novel evidence from a UK bank panel data set from a period that predates the recent financial crisis. Focusing on the behaviour of bank loans, we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer. We find that innovations in a bank's capital in this (precrisis) sample period were coupled with a loan response that lasted up to 3 years. The international presence of UK banks allows us to identify a specific driver of capital shocks in our data, independent of bank lending to UK residents. Specifically, we use write-offs on loans to nonresidents to instrument bank capital's impact on UK resident lending. A fall in capital brought about a significant drop in lending in particular, to Private Nonfinancial Corporations (PNFC). In contrast, household lending increased when capital fell, which may indicate that, in this precrisis period, banks substituted into less risky assets when capital was short.

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File URL: http://hdl.handle.net/10.1080/00036846.2010.537639
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 44 (2012)
Issue (Month): 9 (March)
Pages: 1103-1119

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Handle: RePEc:taf:applec:44:y:2012:i:9:p:1103-1119

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Cited by:
  1. Mark Carlson & Hui Shan & Missaka Warusawitharana, 2011. "Capital ratios and bank lending: a matched bank approach," Finance and Economics Discussion Series 2011-34, Board of Governors of the Federal Reserve System (U.S.).
  2. Jose M. Berrospide & Lamont K. Black & William R. Keeton, 2013. "The cross-market spillover of economic shocks through multi-market banks," Finance and Economics Discussion Series 2013-52, Board of Governors of the Federal Reserve System (U.S.).
  3. Scopelliti, Alessandro Diego, 2013. "Off-balance sheet credit exposure and asset securitisation: what impact on bank credit supply?," MPRA Paper 43890, University Library of Munich, Germany.
  4. Martha López & Fernando TenjO & Héctor Zárate, 2013. "Credit Cycles, Credit Risk and Countercyclical Loan Provisions," Borradores de Economia 788, Banco de la Republica de Colombia.
  5. Tara Rice & Jonathan Rose, 2012. "When good investments go bad: the contraction in community bank lending after the 2008 GSE takeover," International Finance Discussion Papers 1045, Board of Governors of the Federal Reserve System (U.S.).
  6. Mike Mariathasan & Ouarda Merrouche, 2012. "Recapitalization, credit and liquidity," Economic Policy, CEPR & CES & MSH, vol. 27(72), pages 603-646, October.
  7. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.

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