Does Macropru Leak? Evidence from a UK Policy Experiment

45 Pages Posted: 27 Jan 2012

See all articles by Shekhar S. Aiyar

Shekhar S. Aiyar

International Monetary Fund (IMF)

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Tomasz Wieladek

Bank of England

Date Written: January 27, 2012

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

JEL Classification: G21, G28, E32, E51, F30

Suggested Citation

Aiyar, Shekhar S. and Calomiris, Charles W. and Wieladek, Tomasz, Does Macropru Leak? Evidence from a UK Policy Experiment (January 27, 2012). Bank of England Working Paper No. 445. Available at SSRN: https://ssrn.com/abstract=1992991 or http://dx.doi.org/10.2139/ssrn.1992991

Shekhar S. Aiyar

International Monetary Fund (IMF) ( email )

700 19th Street NW - HQ 5-403
Washington, DC 20431
United States
202-623-8638 (Phone)

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
212-316-9219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tomasz Wieladek (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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