The Impact of Capital Requirements on U.K. Bank Behaviour

Abstract

The authors summarize some of the results of Ediz, Michael, and Perraudin (1998) on the impact of bank capital requirements on the capital ratio choices of U.K. banks. They use confidential supervisory data including detailed information about the balance sheet and profit and loss of all British banks over the period 1989-95. The conclusions they reach are reassuring in that capital requirements do seem to affect bank behavior over and above the influence of the banks' own internally generated capital targets. Furthermore, banks appear to achieve adjustments in their capital ratios primarily by directly boosting their capital rather than through systematic substitution away from assets such as corporate loans, which attract high-risk weights in the calculation of Basle Accord-style capital requirements.

Keywords: capital regulation

JEL Classification: G2, G3