Estimating the impact of changes in aggregate bank capital requirements during an upswing

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 28 March 2014

Working Paper No. 494
By Joseph Noss and Priscilla Toffano 

This paper estimates the effect of changes in capital requirements applied to all UK-resident banks on lending by studying the joint dynamics of the aggregate capital ratio of the UK banking system and a set of macro-financial variables. This is achieved by means of sign restrictions that attempt to identify shocks in past data that match a set of assumed directional responses of other variables to future changes in capital requirements aimed at increasing the resilience of the banking system to losses during an upswing. This may provide policymakers with a plausible ‘upper bound’ on the short-term effects of future increases in macroprudential capital requirements in certain states of the economic cycle. An increase in the aggregate bank capital requirement during an economic upswing is associated with a reduction of lending, with the effect larger for lending to corporates than for that to households. The impact on GDP growth is statistically insignificant.
PDF Estimating the impact of changes in aggregate bank capital requirements during an upswing 

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