The Impact of Capital Requirements on Bank Lending

36 Pages Posted: 2 Feb 2014

See all articles by Jonathan Bridges

Jonathan Bridges

Bank of England

David Gregory

Bank of England

Mette Nielsen

Bank of England

Silvia Pezzini

Hong Kong Monetary Authority

Amar Radia

Bank of England

Marco Spaltro

Bank of England

Date Written: January 31, 2014

Abstract

We estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data set, exploiting variation in individual bank capital requirements in the United Kingdom from 1990-2011. There are two key results. First, regulatory capital requirements affect the capital ratios held by banks – following an increase in capital requirements, banks gradually rebuild the buffers that they initially held over the regulatory minimum. Second, capital requirements affect lending with heterogeneous responses in different sectors of the economy – in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, other corporates and household secured lending. The response of unsecured household lending is smaller and insignificant over the first year as a whole. Loan growth mostly recovers within three years. While estimated over a different policy regime and at the individual bank level, these results may contain some insights into how changing capital requirements might affect lending in a macroprudential regime. However, during the transition to higher global regulatory standards, the effects of changes in capital requirements may be different. For example, increasing capital requirements might augment rather than reduce lending for initially undercapitalised banks.

Keywords: Bank capital, bank lending, regulatory capital requirements, capital buffer, macroprudential policy

JEL Classification: G21, G28

Suggested Citation

Bridges, Jonathan and Gregory, David and Nielsen, Mette and Pezzini, Silvia and Radia, Amar and Spaltro, Marco, The Impact of Capital Requirements on Bank Lending (January 31, 2014). Bank of England Working Paper No. 486. Available at SSRN: https://ssrn.com/abstract=2388773 or http://dx.doi.org/10.2139/ssrn.2388773

Jonathan Bridges

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

David Gregory

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mette Nielsen (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Silvia Pezzini

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Amar Radia

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Marco Spaltro

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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