Skip to main content
  • This website sets cookies on your device. To find out more about how we use cookies please refer to our Privacy and Cookie Policy. By continuing to use the site, we’ll assume that you are content for us to set these on your device.
  • Close
Home > Research > Staff Working Paper No. 593: What determines how banks respond to changes in capital requirements? - Saleem Bahaj, Jonathan Bridges, Frederic Malherbe and Cian O’Neill
 

Staff Working Paper No. 593: What determines how banks respond to changes in capital requirements? - Saleem Bahaj, Jonathan Bridges, Frederic Malherbe and Cian O’Neill

15 April 2016

Staff Working Paper No. 593: What determines how banks respond to changes in capital requirements? (3.45MB)
Saleem Bahaj, Jonathan Bridges, Frederic Malherbe and Cian O’Neill

Legacy asset overhang and incentive to shift risk due to government guarantees can both affect bank capital issuance and lending decisions. We show that such frictions lead to ambiguous predictions on how one should expect a bank to react to a change in capital requirements. One sustained prediction is that lending is less sensitive to a change in capital requirements when lending prospects are good and legacy assets are healthy. Using UK bank regulatory data from 1989 to 2007, we find strong empirical support for this prediction.

This version was updated in November 2016.

Share