(When) Do Banks React to Anticipated Capital Reliefs?

34 Pages Posted: 19 Nov 2020 Last revised: 15 Mar 2022

See all articles by Guillaume Arnould

Guillaume Arnould

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES); Bank of England

Benjamin Guin

Bank of England

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Paolo Siciliani

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2020

Abstract

We study how banks react to policy announcements during the representative policy cycle of consultation and policy publication. We use unique data covering the population of all mortgage transactions in the UK complemented with regulatory risk assessments of banks and their supervisory interactions. We show that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low-risk assets after the publication of the policy. Within this group, those banks with a higher frequency of supervisory interactions already react to the first step of policy development, the publication consultation. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.

Keywords: Bank regulation, mortgage lending, supervisory review process, capital requirements

JEL Classification: G21

Suggested Citation

Arnould, Guillaume and Arnould, Guillaume and Guin, Benjamin and Ongena, Steven R. G. and Siciliani, Paolo, (When) Do Banks React to Anticipated Capital Reliefs? (November 13, 2020). Bank of England Working Paper No. 889, Swiss Finance Institute Research Paper No. 20-113, Available at SSRN: https://ssrn.com/abstract=3733513 or http://dx.doi.org/10.2139/ssrn.3733513

Guillaume Arnould (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

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106-112 Boulevard de l'Hôpital
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Benjamin Guin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paolo Siciliani

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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