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(When) Do Banks React to Anticipated Capital Reliefs?

Guillaume Arnould, Benjamin Guin, Steven Ongena and Paolo Siciliani
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Paolo Siciliani: Bank of England

No 20-113, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.

Keywords: Bank regulation; mortgage lending; supervisory review process; capital requirements (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ban and nep-rmg
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