Identifying channels of credit substitution when bank capital requirements are varied
What kinds of credit substitution, if any, occur when changes to banks’ minimum capital requirements induce banks to change their supply of credit? The question is central to the new ‘macroprudential’ policy regimes that have been constructed in the wake of the global financial crisis, under which minimum capital ratio requirements for banks will be employed to control the supply of bank credit. Regulatory efforts to influence the aggregate supply of credit may be thwarted to some degree by ‘leakages’, as other credit suppliers substitute for the variation induced in the supply of credit by regulated banks. Credit substitution could occur through foreign banks operating domestic branches that are not subject to capital regulation by the domestic supervisor, or through bond and stock markets. The UK experience for the period 1998-2007 is ideally suited to address these questions, given its unique regulatory history (UK bank regulators imposed bank-specific and time-varying capital requirements on regulated banks), the substantial presence of both domestically regulated and foreign regulated banks, and the United Kingdom’s deep capital markets. We show that leakage by foreign branches can occur either as a result of competition between branches and regulated banks that are parts of separate banking groups, or because a foreign banking group shifts loans from its UK-regulated subsidiary to its affiliated branch. The responsiveness of affiliated branches is nearly twice as strong. We do not find any evidence for leakages through capital markets. These findings reinforce the need for the type of international co-ordination, specifically reciprocity in capital requirement regulation, which is embedded in Basel III and the European CRD IV directive, which will be gradually phased in starting January 2014.
|Date of creation:||31 Jan 2014|
|Date of revision:|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0485. 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: (Digital Media Team)
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.