(When) do banks react to anticipated capital reliefs?

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 13 November 2020

Staff Working Paper No. 889

By Guillaume Arnould, Benjamin Guin, Steven Ongena and Paolo Siciliani

We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.

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