The impact of capital requirements on bank lending
We estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data set, exploiting variation in individual bank capital requirements in the United Kingdom from 1990-2011. There are two key results. First, regulatory capital requirements affect the capital ratios held by banks – following an increase in capital requirements, banks gradually rebuild the buffers that they initially held over the regulatory minimum. Second, capital requirements affect lending with heterogeneous responses in different sectors of the economy – in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, other corporates and household secured lending. The response of unsecured household lending is smaller and insignificant over the first year as a whole. Loan growth mostly recovers within three years. While estimated over a different policy regime and at the individual bank level, these results may contain some insights into how changing capital requirements might affect lending in a macroprudential regime. However, during the transition to higher global regulatory standards, the effects of changes in capital requirements may be different. For example, increasing capital requirements might augment rather than reduce lending for initially undercapitalised banks.
|Date of creation:||31 Jan 2014|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
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.:
- Button, Richard & Pezzini, Silvia & Rossiter, Neil, 2010. "Understanding the price of new lending to households," Bank of England Quarterly Bulletin, Bank of England, vol. 50(3), pages 172-182.
- Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
- Peek, Joe & Rosengren, Eric S, 1997.
"The International Transmission of Financial Shocks: The Case of Japan,"
American Economic Review,
American Economic Association, vol. 87(4), pages 495-505, September.
- Joe Peek & Eric S. Rosengren, 1996. "The international transmission of financial shocks: the case of Japan," Working Papers 96-1, Federal Reserve Bank of Boston.
- Joe Peek & Eric S. Rosengren, 1996. "The International Transmission of Financial Shocks: The Case of Japan," Boston College Working Papers in Economics 357, Boston College Department of Economics.
- Rime, Bertrand, 2001. "Capital requirements and bank behaviour: Empirical evidence for Switzerland," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 789-805, April.
- Den Haan, Wouter & Sumner, Steven & Yamashiro, Guy, 2004.
"Banks' Loan Portfolio and the Monetary Transmission Mechanism,"
CEPR Discussion Papers
4725, C.E.P.R. Discussion Papers.
- den Haan, Wouter J. & Sumner, Steven W. & Yamashiro, Guy M., 2007. "Bank loan portfolios and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 904-924, April.
- Adam B. Ashcraft, 2004.
"Are bank holding companies a source of strength to their banking subsidiaries?,"
189, Federal Reserve Bank of New York.
- Adam B. Ashcraft, 2008. "Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 273-294, 03.
- 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.
- Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2012. "Does Macro-Pru Leak? Evidence from a UK Policy Experiment," NBER Working Papers 17822, National Bureau of Economic Research, Inc.
- Frank Heid & Daniel Porath & Stéphanie Stolz, 2003.
"Does Capital Regulation Matter for Bank Behavior? Evidence for German savings banks,"
Kiel Working Papers
1192, Kiel Institute for the World Economy.
- Heid, Frank & Porath, Daniel & Stolz, Stéphanie, 2004. "Does capital regulation matter for bank behaviour? Evidence for German savings banks," Discussion Paper Series 2: Banking and Financial Studies 2004,03, Deutsche Bundesbank, Research Centre.
- Janet L. Yellen, 2010.
"Macroprudential supervision and monetary policy in the post-crisis world,"
551, Board of Governors of the Federal Reserve System (U.S.).
- Janet L Yellen, 2011. "Macroprudential Supervision and Monetary Policy in the Post-crisis World," Business Economics, Palgrave Macmillan, vol. 46(1), pages 3-12, January.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- Stolz, Stéphanie & Wedow, Michael, 2005. "Banks' regulatory capital buffer and the business cycle: evidence for German savings and cooperative banks," Discussion Paper Series 2: Banking and Financial Studies 2005,07, Deutsche Bundesbank, Research Centre.
- Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
- William Francis & Matthew Osborne, 2009. "Bank regulation, capital and credit supply: Measuring the Impact of Prudential Standards," Occasional Papers 36, Financial Services Authority.
- 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.
- 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.
- Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
- repec:fip:fedgsq:y:2010:i:oct11 is not listed on IDEAS
- Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0486. 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: (Publications 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.