The real effects of capital requirements and monetary policy: evidence from the United Kingdom

Filippo De Marco and Tomasz Wieladek

No 573, Bank of England working papers from Bank of England

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 and monetary policy (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2015-12-18
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-ent, nep-mon and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: The real effects of capital requirements and monetary policy: Evidence from the United Kingdom (2021)
Working Paper: The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom (2016)
Working Paper: The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0573

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