Bank Capital Requirements and Balance Sheet Management Practices: Has the Relationship Changed after the Crisis?

58 Pages Posted: 14 Dec 2016

See all articles by Sebastian de-Ramon

Sebastian de-Ramon

Bank of England; Bank of England - Prudential Regulation Authority; Cambridge Econometrics

William Francis

Bank of England

Qun Harris

Bank of England

Date Written: December 9, 2016

Abstract

We use a proprietary database of individual UK capital requirements spanning 1989 to 2013 and panel regression techniques to evaluate whether the effects of capital requirements on banks’ balance sheet adjustments changed after the 2008–09 financial crisis. We find that after the crisis banks placed more emphasis on overall asset deleveraging. A 1 percentage point increase in capital requirements lowered total asset growth by 14 basis points before the crisis and 20 basis points after the crisis. We also find evidence of a structural change in banks’ capital management practices, with banks increasing better-quality, Tier 1 capital significantly more in response to higher requirements after the crisis than they did before the crisis. However, the effects of capital requirements on lending and risk-weighted asset growth both before and after the crisis are similar. Our results suggest that both before and after the crisis, a 1 percentage point increase in capital requirements lowered annual loan (risk-weighted asset) growth by 8 (12) basis points.

Keywords: banking, regulatory capital requirements, bank capital ratios, bank credit supply, macroprudential tools

JEL Classification: D21, G21, G28

Suggested Citation

de-Ramon, Sebastian and Francis, William and Harris, Qun, Bank Capital Requirements and Balance Sheet Management Practices: Has the Relationship Changed after the Crisis? (December 9, 2016). Bank of England Working Paper No. 635, Available at SSRN: https://ssrn.com/abstract=2885244 or http://dx.doi.org/10.2139/ssrn.2885244

Sebastian De-Ramon (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bank of England - Prudential Regulation Authority ( email )

20 Moorgate
London, EC2R 6DA
United Kingdom

Cambridge Econometrics ( email )

Reuben House
Covent Garden
Cambridge, CB1 2HT
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/sebastian-de-ramon

William Francis

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Qun Harris

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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