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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.

Suggested Citation

  • Nada Mora & Andrew Logan, 2012. "Shocks to bank capital: evidence from UK banks at home and away," Applied Economics, Taylor & Francis Journals, vol. 44(9), pages 1103-1119, March.
  • Handle: RePEc:taf:applec:44:y:2012:i:9:p:1103-1119 DOI: 10.1080/00036846.2010.537639
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    Cited by:

    1. Malgorzata Olszak & Mateusz Pipien & Sylwia Roszkowska, 2016. "The Impact Of Capital Ratio On Lending Of Eu Banks – The Role Of Bank Specialization And Capitalization," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 11(1), pages 43-59, March.
    2. Carlson, Mark & Shan, Hui & Warusawitharana, Missaka, 2013. "Capital ratios and bank lending: A matched bank approach," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 663-687.
    3. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2017. "Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 2126-2177.
    4. 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.).
    5. Martha López & Fernando Tenjo Galarza & Hector Zárate, 2014. "Credit Cycles, Credit Risk and Countercyclical Loan Provisions," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(74), pages 9-17, June.
    6. Huang, Xian & Xiong, Qiyue, 2015. "Bank capital buffer decisions under macroeconomic fluctuations: Evidence for the banking industry of China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 30-39.
    7. Rice, Tara & Rose, Jonathan, 2016. "When good investments go bad: The contraction in community bank lending after the 2008 GSE takeover," Journal of Financial Intermediation, Elsevier, vol. 27(C), pages 68-88.
    8. Olivier De Jonghey & Hans Dewachter & Steven Ongenax, 2016. "Bank capital (requirements) and credit supply: Evidence from pillar 2 decisions," Working Paper Research 303, National Bank of Belgium.
    9. Polat, Tandogan, 2016. "Essays on banking sector’s dynamics, expectations, preferences and impact," Other publications TiSEM d064f029-f91e-47bc-b6d3-0, Tilburg University, School of Economics and Management.
    10. 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.
    11. Noss, Joseph & Toffano, Priscilla, 2016. "Estimating the impact of changes in aggregate bank capital requirements on lending and growth during an upswing," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 15-27.
    12. Gropp, Reint & Radev, Deyan, 2017. "International banking conglomerates and the transmission of lending shocks across borders," SAFE Working Paper Series 175, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    13. Tara Rice & Jonathan D. 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.).
    14. Michael R.M. Abrigo & Inessa Love, 2016. "Estimation of Panel Vector Autoregression in Stata: a Package of Programs," Working Papers 201602, University of Hawaii at Manoa, Department of Economics.
    15. Kupiec, Paul & Lee, Yan & Rosenfeld, Claire, 2017. "Does bank supervision impact bank loan growth?," Journal of Financial Stability, Elsevier, vol. 28(C), pages 29-48.
    16. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
    17. Malgorzata Olszak & Mateusz Pipien & Sylwia Roszkowska & Iwona Kowalska, 2014. "The effects of capital on bank lending in large EU banks – the role of procyclicality, income smoothing, regulations and supervision," Faculty of Management Working Paper Series 52014, University of Warsaw, Faculty of Management.
    18. Mike Mariathasan & Ouarda Merrouche, 2012. "Recapitalization, credit and liquidity," Economic Policy, CEPR;CES;MSH, vol. 27(72), pages 603-646, October.
    19. Gropp, Reint E. & Radev, Deyan, 2017. "International banking conglomerates and the transmission of lending shocks across borders," IWH Discussion Papers 19/2017, Halle Institute for Economic Research (IWH).

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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