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

48 Pages Posted: 16 Nov 2016 Last revised: 28 Jun 2021

See all articles by Filippo De Marco

Filippo De Marco

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

Christiane Kneer

Bank of England

Tomasz Wieladek

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: June 22, 2021

Abstract

We examine how changes in capital requirements and monetary policy shocks affect corporate investment during a credit boom. Our empirical analysis uses data on SMEs in the UK between 1998 and 2006, a period when monetary policy and microprudential regulation were set by independent institutions. We find that an increase in bank-specific capital requirements led to a contraction in corporate debt and investment, but only for firms with short bank relationships. This suggests that relationships between firms and banks are crucial for the transmission of regulatory shocks. Long relationships also attenuate the impact of monetary policy shocks, but to a smaller degree than for capital requirement changes. We also find that the two policies do not dampen or amplify the effect of each other, but their effects vary with the size of banks’ capital buffers and the creditworthiness of firms.

Keywords: Capital requirements, monetary policy shocks, real effects, relationship lending

JEL Classification: G21, G28, E51

Suggested Citation

De Marco, Filippo and Kneer, Christiane and Wieladek, Tomasz, The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom (June 22, 2021). BAFFI CAREFIN Centre Research Paper No. 2016-40, Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2869838 or http://dx.doi.org/10.2139/ssrn.2869838

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

CEPR Financial Economics ( email )

London
United Kingdom

Christiane Kneer

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tomasz Wieladek

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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