IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v46y2014is1p181-214.html
   My bibliography  Save this article

Does Macro‐Prudential Regulation Leak? Evidence from a UK Policy Experiment

Author

Listed:
  • SHEKHAR AIYAR
  • CHARLES W. CALOMIRIS
  • TOMASZ WIELADEK

Abstract

The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro‐prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the UK, regulators have imposed time‐varying, bank‐specific minimum capital requirements since Basel I. It is found that regulated banks (UK‐owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one‐third of the initial impulse from the regulatory change.

Suggested Citation

  • Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2014. "Does Macro‐Prudential Regulation Leak? Evidence from a UK Policy Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 181-214, February.
  • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:s1:p:181-214
    DOI: 10.1111/jmcb.12086
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jmcb.12086
    Download Restriction: no

    File URL: https://libkey.io/10.1111/jmcb.12086?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
    2. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
    3. Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
    4. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    5. 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.
    6. 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.
    7. 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.
    8. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
    9. Francis, William B. & Osborne, Matthew, 2012. "Capital requirements and bank behavior in the UK: Are there lessons for international capital standards?," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 803-816.
    10. Isaac Alfon & Isabel Argimón & Patricia Bascuñana-Ambrós, 2005. "How individual capital requirements affect capital ratios in UK banks and building societies," Working Papers 0515, Banco de España.
    11. Gabriele Galati & Richhild Moessner, 2013. "Macroprudential Policy – A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 27(5), pages 846-878, December.
    12. Concetta Chiuri, Maria & Ferri, Giovanni & Majnoni, Giovanni, 2002. "The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 881-904, May.
    13. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
    14. Gerard Caprio & James Barth & Ross Levine, 2008. "Bank Regulations Are Changing: But For Better or Worse?," Center for Development Economics 2008-04, Department of Economics, Williams College.
    15. David VanHoose, 2008. "Bank Capital Regulation, Economic Stability, and Monetary Policy: What Does the Academic Literature Tell Us?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(1), pages 1-14, March.
    16. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    17. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-638, August.
    18. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    19. Mr. Martin Cihak & Mr. Klaus Schaeck, 2007. "Banking Competition and Capital Ratios," IMF Working Papers 2007/216, International Monetary Fund.
    20. James R Barth & Gerard Caprio & Ross Levine, 2008. "Bank Regulations are Changing: For Better or Worse?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(4), pages 537-563, December.
    21. Aiyar, Shekhar, 2011. "How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom," Bank of England working papers 424, Bank of England.
    22. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, August.
    23. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    24. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    25. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    26. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    27. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    28. Shekhar Aiyar, 2012. "From Financial Crisis to Great Recession: The Role of Globalized Banks," American Economic Review, American Economic Association, vol. 102(3), pages 225-230, May.
    29. Murillo Campello, 2002. "Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy," Journal of Finance, American Finance Association, vol. 57(6), pages 2773-2805, December.
    30. Barth, James R. & Caprio, Gerard, Jr. & Levine, Ross, 2008. "Bank regulations are changing : for better or worse ?," Policy Research Working Paper Series 4646, The World Bank.
    31. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    32. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    33. Sumit Agarwal, 2010. "Distance and Private Information in Lending," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
    34. James, Christopher & Wier, Peggy, 1990. "Borrowing relationships, intermediation, and the cost of issuing public securities," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 149-171.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aiyar, Shekhar & Calomiris , Charles W & Wieladek, Tomasz, 2012. "Does macropru leak? Evidence from a UK policy experiment," Bank of England working papers 445, Bank of England.
    2. 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.
    3. Charles W. Calomiris & Richard J. Herring, 2013. "How to Design a Contingent Convertible Debt Requirement That Helps Solve Our Too-Big-to-Fail Problem," Journal of Applied Corporate Finance, Morgan Stanley, vol. 25(2), pages 39-62, June.
    4. Agoraki, Maria-Eleni K. & Kouretas, Georgios P., 2021. "Loan growth, ownership, and regulation in the European Banking Sector: Old versus new banking landscape," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    5. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    6. 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.
    7. Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2015. "How to Strengthen the Regulation of Bank Capital: Theory, Evidence, and A Proposal," Journal of Applied Corporate Finance, Morgan Stanley, vol. 27(1), pages 27-36, March.
    8. Thomas Hemmelgarn & Daniel Teichmann, 2014. "Tax reforms and the capital structure of banks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 645-693, August.
    9. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
    10. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    11. Aiyar, Shekhar & Calomiris, Charles W. & Hooley, John & Korniyenko, Yevgeniya & Wieladek, Tomasz, 2014. "The international transmission of bank capital requirements: Evidence from the UK," Journal of Financial Economics, Elsevier, vol. 113(3), pages 368-382.
    12. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    13. Uluc, Arzu & Wieladek, Tomasz, 2015. "Capital requirements, risk shifting and the mortgage market," Bank of England working papers 572, Bank of England.
    14. Uluc, Arzu & Wieladek, Tomasz, 2018. "Capital requirements, monetary policy and risk shifting in the mortgage market," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 3-16.
    15. Gambacorta, Leonardo & Shin, Hyun Song, 2018. "Why bank capital matters for monetary policy," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 17-29.
    16. 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.
    17. Louhichi, Awatef & Boujelbene, Younes, 2017. "Bank capital, lending and financing behaviour of dual banking systems," Journal of Multinational Financial Management, Elsevier, vol. 41(C), pages 61-79.
    18. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    19. De Marco, Filippo & Kneer, Christiane & Wieladek, Tomasz, 2021. "The real effects of capital requirements and monetary policy: Evidence from the United Kingdom," Journal of Banking & Finance, Elsevier, vol. 133(C).
    20. Markus Behn & Rainer Haselmann & Paul Wachtel, 2016. "Procyclical Capital Regulation and Lending," Journal of Finance, American Finance Association, vol. 71(2), pages 919-956, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jmoncb:v:46:y:2014:i:s1:p:181-214. 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: . General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.