IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

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

  • Francis, William B.
  • Osborne, Matthew

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0378426611002652
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

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

as
in new window

Handle: RePEc:eee:jbfina:v:36:y:2012:i:3:p:803-816
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  2. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  3. Repullo, Rafael & Saurina, Jesús & Trucharte, Carlos, 2009. "Mitigating the Procyclicality of Basel II," CEPR Discussion Papers 7382, C.E.P.R. Discussion Papers.
  4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  5. Hancock, Diana & Laing, Andrew J. & Wilcox, James A., 1995. "Bank capital shocks: Dynamic effects on securities, loans, and capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 661-677, June.
  6. Craig Furfine, 2001. "Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions," Journal of Financial Services Research, Springer, vol. 20(1), pages 33-56, September.
  7. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  8. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
  9. Jose M. Berrospide & Rochelle M. Edge, 2010. "The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 1-50, December.
  10. Diana Hancock & James A. Wilcox, 1994. "Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 59-94.
  11. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Patrick McGuire & Ilhyock Nikola Tarashev, 2008. "Global monitoring with the BIS international banking statistics," BIS Working Papers 244, Bank for International Settlements.
  13. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
  14. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  15. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
  16. Jose M. Berrospide & Rochelle M. Edge, 2010. "The effects of bank capital on lending: what do we know, and what does it mean?," Finance and Economics Discussion Series 2010-44, Board of Governors of the Federal Reserve System (U.S.).
  17. Bank for International Settlements, 2009. "The role of valuation and leverage in procyclicality," CGFS Papers, Bank for International Settlements, number 34, April.
  18. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  19. Jose M. Berrospide & Rochelle M. Edge, 2010. "The effects of bank capital on lending: What do we know, and what does it mean?," CAMA Working Papers 2010-26, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  20. Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 25-46, January.
  21. Huang, Zhangkai, 2003. "Evidence of a bank lending channel in the UK," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 491-510, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:36:y:2012:i:3:p:803-816. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.