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Estimating the impact of changes in aggregate bank capital requirements during an upswing

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  • Noss, Joseph

    () (Bank of England)

  • Toffano, Priscilla

    () (International Monetary Fund)

Abstract

This paper estimates the effect of changes in capital requirements applied to all UK-resident banks on lending by studying the joint dynamics of the aggregate capital ratio of the UK banking system and a set of macro-financial variables. This is achieved by means of sign restrictions that attempt to identify shocks in past data that match a set of assumed directional responses of other variables to future changes in capital requirements aimed at increasing the resilience of the banking system to losses during an upswing. This may provide policymakers with a plausible ‘upper bound’ on the short-term effects of future increases in macroprudential capital requirements in certain states of the economic cycle. An increase in the aggregate bank capital requirement during an economic upswing is associated with a reduction of lending, with the effect larger for lending to corporates than for that to households. The impact on GDP growth is statistically insignificant.

Suggested Citation

  • Noss, Joseph & Toffano, Priscilla, 2014. "Estimating the impact of changes in aggregate bank capital requirements during an upswing," Bank of England working papers 494, Bank of England.
    • Handle: RePEc:boe:boeewp:0494
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:bog:econbl:y:2016:i:43:p:7 is not listed on IDEAS
    2. Martinez-Miera, David & Repullo, Rafael, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," CEPR Discussion Papers 13530, C.E.P.R. Discussion Papers.
    3. repec:pal:jbkreg:v:20:y:2019:i:2:d:10.1057_s41261-018-0076-1 is not listed on IDEAS
    4. Natalya Martynova, 2015. "Effect of bank capital requirements on economic growth: a survey," DNB Working Papers 467, Netherlands Central Bank, Research Department.
    5. repec:bog:econbl:y:2016:i:43:p:19-29 is not listed on IDEAS
    6. repec:bog:econbl:y:2016:i:43:p:31-53 is not listed on IDEAS
    7. Luca Papi & Emma Sarno & Alberto Zazzaro, 2017. "The geographical network of bank organizations: issues and evidence for Italy," Chapters, in: Ron Martin & Jane Pollard (ed.), Handbook on the Geographies of Money and Finance, chapter 8, pages 156-196, Edward Elgar Publishing.
    8. Shimizu, Katsutoshi, 2015. "Adjusting denominators of capital ratios: Evidence from Japanese banks," Journal of Financial Stability, Elsevier, vol. 19(C), pages 60-68.
    9. Peltonen, Tuomas A. & Gross, Marco & Behn, Markus, 2016. "Assessing the costs and benefits of capital-based macroprudential policy," Working Paper Series 1935, European Central Bank.
    10. repec:bog:econbl:y:2016:i:43:p:31 is not listed on IDEAS
    11. repec:bog:econbl:y:2016:i:43:p:55-75 is not listed on IDEAS
    12. Tölö, Eero & Miettinen, Paavo, 2018. "How do shocks to bank capital affect lending and growth?," Research Discussion Papers 25/2018, Bank of Finland.
    13. Hense, Florian, 2015. "Interest rate elasticity of bank loans: The case for sector-specific capital requirements," CFS Working Paper Series 504, Center for Financial Studies (CFS).
    14. repec:zbw:ifweej:201841 is not listed on IDEAS
    15. repec:bog:econbl:y:2016:i:43:p:7-17 is not listed on IDEAS
    16. repec:bog:econbl:y:2016:i:43:p:55 is not listed on IDEAS
    17. Simona Malovana, 2017. "Banks' Capital Surplus and the Impact of Additional Capital Requirements," Working Papers 2017/8, Czech National Bank.
    18. Niall McInerney, 2016. "A Structural Model of Macroprudential Policy: the Case of Ireland," EcoMod2016 9643, EcoMod.
    19. repec:nbp:nbpbik:v:48:y:2017:i:2:p:119-148 is not listed on IDEAS

    More about this item

    Keywords

    Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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