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Does macropru leak? Evidence from a UK policy experiment

Shekhar Aiyar (), Charles Calomiris and Tomasz Wieladek

No 445, Bank of England working papers from Bank of England

Abstract: The regulation of bank capital to improve the resilience of the financial system and, related to this aim, as a means of smoothing the credit cycle are central elements of forthcoming macroprudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit: (i) changes in capital requirements need to affect loan supply by regulated banks, and (ii) substitute sources of credit should not fully offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the United Kingdom, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. Over the 1998-2007 period, UK-regulated banks reduced lending in response to tighter capital requirements. But non UK-regulated banks (resident foreign branches) increased lending in response to tighter capital requirements on a relevant reference group of regulated banks. This ‘leakage’ was material although only partial: it offset—by about one third—the initial impulse from the regulatory change. These results suggest that, on balance, changes in capital requirements can have a substantial impact on aggregate credit supply by UK-resident banks. But they also affirm the importance of cross-country co-operation on macroprudential policies.

Keywords: Macroprudential regulation; credit cycles; regulatory arbitrage; transmission mechanism; bank lending; instrumental variables (search for similar items in EconPapers)
JEL-codes: E32 E51 F30 G21 G28 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2012-01-27
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