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How does credit supply respond to monetary policy and bank minimum capital requirements?

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  • Aiyar, Shekhar
  • Calomiris, Charles W.
  • Wieladek, Tomasz

Abstract

We use data on UK banks׳ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macro-prudential variation in capital requirements.

Suggested Citation

  • Aiyar, Shekhar & Calomiris, Charles W. & Wieladek, Tomasz, 2016. "How does credit supply respond to monetary policy and bank minimum capital requirements?," European Economic Review, Elsevier, vol. 82(C), pages 142-165.
  • Handle: RePEc:eee:eecrev:v:82:y:2016:i:c:p:142-165
    DOI: 10.1016/j.euroecorev.2015.07.021
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    Cited by:

    1. de-Ramon, Sebastian J A & Francis, William & Harris, Qun, 2016. "Bank capital requirements and balance sheet management practices: has the relationship changed after the crisis?," Bank of England working papers 635, Bank of England.
    2. Cerutti, Eugenio & Claessens, Stijn & Laeven, Luc, 2017. "The use and effectiveness of macroprudential policies: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 203-224.
    3. Adrian, Tobias & Liang, J. Nellie, 2014. "Monetary policy, financial conditions, and financial stability," Staff Reports 690, Federal Reserve Bank of New York, revised 01 Dec 2016.
    4. Xiong, Wanting & Wang, Yougui, 2017. "The impact of Basel III on money creation: A synthetic analysis," Economics Discussion Papers 2017-53, Kiel Institute for the World Economy (IfW).
    5. Sergio Mayordomo & María Rodríguez-Moreno, 2017. "Did the bank capital relief induced by the supporting factor enhance SME lending?," Working Papers 1746, Banco de España;Working Papers Homepage.
    6. Malovaná, Simona & Frait, Jan, 2017. "Monetary policy and macroprudential policy: Rivals or teammates?," Journal of Financial Stability, Elsevier, vol. 32(C), pages 1-16.
    7. repec:nbp:nbpbik:v:48:y:2017:i:2:p:119-148 is not listed on IDEAS
    8. Chris Garbers & Guangling Liu, 2017. "Macroprudential policy and foreign interest rate shocks: A comparison of different instruments and regulatory regimes," Working Papers 15/2017, Stellenbosch University, Department of Economics.
    9. Aikman, David & Haldane, Andrew & Hinterschweiger, Marc & Kapadia, Sujit, 2018. "Rethinking financial stability," Bank of England working papers 712, Bank of England.
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    12. Ramaswamy, R., 2018. "A Decade After Lehman: Taking Stock of Quantitative Easing and Regulation," Cambridge Working Papers in Economics 1824, Faculty of Economics, University of Cambridge.
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    16. Apostolos Thomadakis, 2015. "Determinants of Credit Constrained Firms: Evidence from Central and Eastern Europe Region," Bank of Lithuania Working Paper Series 22, Bank of Lithuania.
    17. repec:eee:eecrev:v:95:y:2017:i:c:p:125-141 is not listed on IDEAS
    18. Raphael Auer & Steven Ongena, 2016. "The countercyclical capital buffer and the composition of bank lending," BIS Working Papers 593, Bank for International Settlements.

    More about this item

    Keywords

    G21; G18; E51; E52; E4; Loan supply; Capital requirements; Monetary policy; Macro-prudential regulation;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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