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Does Macro-Pru Leak? Evidence from a UK Policy Experiment

Author

Listed:
  • 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.

Suggested Citation

  • Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2012. "Does Macro-Pru Leak? Evidence from a UK Policy Experiment," NBER Working Papers 17822, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17822
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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