How does credit supply respond to monetary policy and bank minimum capital requirements?

Shekhar Aiyar, Charles Calomiris and Tomasz Wieladek

No 508, Bank of England working papers from Bank of England

Abstract: We use data on UK banks’ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks, and the lack of interaction between capital requirement changes and monetary policy, have important policy implications. Our results confirm the theoretical consensus view that monetary policy should focus on price stability objectives and that capital requirement changes are a more effective tool to achieve financial stability objectives related to loan supply. We also identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macroprudential variation in capital requirements.

Keywords: loan supply; capital requirements; monetary policy; macroprudential regulation (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G18 G21 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014-09-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Related works:
Journal Article: How does credit supply respond to monetary policy and bank minimum capital requirements? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0508

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