Capital requirements and bank behavior in the UK: Are there lessons for international capital standards?

William Francis () and Matthew Osborne

Journal of Banking & Finance, 2012, vol. 36, issue 3, 803-816

Abstract: The financial crisis prompted widespread interest in developing a better understanding of how capital regulation drives bank behavior. This paper uses a unique, comprehensive database of regulatory capital requirements on all UK banks to examine their effects on capital, lending and balance sheet management behavior. We find that capital requirements that include firm-specific, time-varying add-ons set by supervisors affect banks’ desired capital ratios and that resulting adjustments to capital and lending depend on the gap between actual and target ratios. We use these results to measure the effects of a capital regime that includes features similar to those embedded in the UK framework. Our results suggest that countercyclical capital requirements may be less effective in slowing credit activity when banks can readily satisfy them with lower-quality (lower-costing) capital elements versus higher-quality common equity. Given the size of the UK banking sector and the global nature of many of the largest institutions in the UK banking sector, the results have implications for the ongoing debate surrounding the design and calibration of international capital standards.

Keywords: Bank capital channel; Regulatory capital requirements; Bank capital ratios; Bank credit supply; Countercyclical capital policy; Macroprudential tools (search for similar items in EconPapers)
JEL-codes: D21 G21 G28 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (118)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426611002652
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:3:p:803-816

DOI: 10.1016/j.jbankfin.2011.09.011

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().