The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom

65 Pages Posted: 22 Dec 2015

See all articles by Filippo De Marco

Filippo De Marco

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Tomasz Wieladek

Bank of England

Date Written: December 2015

Abstract

We study the effect of changes to UK bank-specific capital requirements on small and medium-sized enterprises (SME) from 1999 to 2005. Following a 1% rise in capital requirements, SME asset growth (and investment) contracts by 3.5% to 6.9% (12%) in the first year of a new bank-firm relationship, but this effect declines over time. These results are robust to a number of different fixed effects specifications and measures of capital requirement changes that are orthogonal to balance sheet characteristics by construction. Banks with tight capital buffers are the most significant transmitters of this shock. Monetary policy only affects the asset growth of small bank borrowers, but has a similar impact on the same sectors as capital requirements. There is evidence that these instruments reinforce each other when tightened, but only for small banks. Firms that borrow from multiple banks and operate in sectors with alternative forms of finance are less (equally) affected by changes in capital requirements (monetary policy).

Keywords: Capital requirements, firm-level data, SMEs, relationship lending, macroprudential

JEL Classification: G21, G28

Suggested Citation

De Marco, Filippo and Wieladek, Tomasz, The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom (December 2015). Staff Working Paper No. 573. Available at SSRN: https://ssrn.com/abstract=2706465 or http://dx.doi.org/10.2139/ssrn.2706465

Filippo De Marco (Contact Author)

Bocconi University - Department of Finance ( email )

Department of Finance
Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Tomasz Wieladek

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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