Working Paper: NBER ID: w17822
Authors: Shekhar Aiyar; Charles W. Calomiris; Tomasz Wieladek
Abstract: The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro-prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence--lacking to date--on both questions, using a unique dataset. In the UK, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. It is found that regulated banks (UK-owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This "leakage" is substantial, amounting to about one-third of the initial impulse from the regulatory change.
Keywords: Macroprudential Regulation; Capital Requirements; Bank Lending; Regulatory Leakages
JEL Codes: E32; E51; F30; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tighter capital requirements (G28) | Reduced lending by regulated banks (G21) |
| Tighter capital requirements (G28) | Increased lending by unregulated banks (G21) |
| Tighter capital requirements (G28) | Negative elasticity of loan supply (E51) |