The impact of capital requirements on bank lending
AbstractWe estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data set, exploiting variation in individual bank capital requirements in the United Kingdom from 1990-2011. There are two key results. First, regulatory capital requirements affect the capital ratios held by banks – following an increase in capital requirements, banks gradually rebuild the buffers that they initially held over the regulatory minimum. Second, capital requirements affect lending with heterogeneous responses in different sectors of the economy – in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, other corporates and household secured lending. The response of unsecured household lending is smaller and insignificant over the first year as a whole. Loan growth mostly recovers within three years. While estimated over a different policy regime and at the individual bank level, these results may contain some insights into how changing capital requirements might affect lending in a macroprudential regime. However, during the transition to higher global regulatory standards, the effects of changes in capital requirements may be different. For example, increasing capital requirements might augment rather than reduce lending for initially undercapitalised banks.
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Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 486.
Length: 36 pages
Date of creation: 31 Jan 2014
Date of revision:
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Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-08 (All new papers)
- NEP-BAN-2014-02-08 (Banking)
- NEP-CBA-2014-02-08 (Central Banking)
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