Abstract
This paper estimates the impact of changing banks ’ capital requirements on bank capital ratios and bank lending. It exploits changes in bank capital requirements by banking supervisors in the United Kingdom between 1990 and 2011, provides a novel breakdown of the lending effects by economic sector and a timeline over which the effects take place. There are two key results. First, following an increase in capital requirements, banks gradually rebuild the buffers they hold over the regulatory minimum so they remain constant. Second, in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, for other corporates and for household secured lending. Loan growth mostly recovers within three years. These results may help quantify how changing capital requirements might affect lending in a macroprudential policy framework.
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