The real effects of capital requirements and monetary policy: Evidence from the United Kingdom

Filippo De Marco, Christiane Kneer and Tomasz Wieladek

Journal of Banking & Finance, 2021, vol. 133, issue C

Abstract: We examine how changes in capital requirements and monetary policy shocks affect corporate investment during a credit boom. Our empirical analysis uses data on SMEs in the UK between 1998 and 2006, a period when monetary policy and microprudential regulation were set by independent institutions. We find that an increase in bank-specific capital requirements led to a contraction in corporate debt and investment, but only for firms with short bank relationships. This suggests that relationships between firms and banks are crucial for the transmission of regulatory shocks. Long relationships also attenuate the impact of monetary policy shocks, but to a smaller degree than for capital requirement changes. We also find that the two policies do not dampen or amplify the effect of each other, but their effects vary with the size of banks’ capital buffers and the creditworthiness of firms.

Keywords: Capital requirements; Monetary policy shocks; Real effects; Relationship lending (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom (2016)
Working Paper: The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom (2016)
Working Paper: The real effects of capital requirements and monetary policy: evidence from the United Kingdom (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621001965

DOI: 10.1016/j.jbankfin.2021.106237

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