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Does macropru leak? Evidence from a UK policy experiment

Author

Listed:
  • Aiyar, Shekhar

    (Bank of England)

  • Calomiris , Charles W

    (Columbia Business School)

  • Wieladek, Tomasz

    (London Business School)

Abstract
The regulation of bank capital to improve the resilience of the financial system and, related to this aim, as a means of smoothing the credit cycle are central elements of forthcoming macroprudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit: (i) changes in capital requirements need to affect loan supply by regulated banks, and (ii) substitute sources of credit should not fully offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the United Kingdom, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. Over the 1998-2007 period, UK-regulated banks reduced lending in response to tighter capital requirements. But non UK-regulated banks (resident foreign branches) increased lending in response to tighter capital requirements on a relevant reference group of regulated banks. This ‘leakage’ was material although only partial: it offset—by about one third—the initial impulse from the regulatory change. These results suggest that, on balance, changes in capital requirements can have a substantial impact on aggregate credit supply by UK-resident banks. But they also affirm the importance of cross-country co-operation on macroprudential policies.

Suggested Citation

  • Aiyar, Shekhar & Calomiris , Charles W & Wieladek, Tomasz, 2012. "Does macropru leak? Evidence from a UK policy experiment," Bank of England working papers 445, Bank of England.
    • Handle: RePEc:boe:boeewp:0445
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    More about this item

    Keywords

    Macroprudential regulation; credit cycles; regulatory arbitrage; transmission mechanism; bank lending; instrumental variables;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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