What determines how banks respond to changes in capital requirements?

Saleem Bahaj, Jonathan Bridges (), Frederic Malherbe and Cian O’Neill ()
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Cian O’Neill: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Authors registered in the RePEc Author Service: Cian O'Neill

No 593, Bank of England working papers from Bank of England

Abstract: Legacy asset overhang and incentive to shift risk due to government guarantees can both affect bank capital issuance and lending decisions. We show that such frictions lead to ambiguous predictions on how one should expect a bank to react to a change in capital requirements. One sustained prediction is that lending is less sensitive to a change in capital requirements when lending prospects are good and legacy assets are healthy. Using UK bank regulatory data from 1989 to 2007, we find strong empirical support for this prediction.

Keywords: Debt overhang; risk-shifting; bank capital; local projections (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-04-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0593

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