In Good Times and in Bad: Bank Capital Ratios and Lending Rates

35 Pages Posted: 12 Dec 2011 Last revised: 10 Feb 2016

See all articles by Matthew Osborne

Matthew Osborne

Bank of England

Ana-Maria Fuertes

Cass Business School, City University of London

Alistair Milne

Loughborough University - School of Business and Economics

Date Written: December 13, 2014

Abstract

This paper investigates the relationship between bank capital ratios and lending rates using data from 1998 to 2012 for 13 large banks accounting for 75% of total UK lending. We document a substantial change in the coefficient of the Tier 1 capital ratio in reduced-form regressions for secured household lending rates; the coefficient changes from positive pre-crisis to negative in crisis. Significant changes are also detected in the relationship for unsecured household and corporate lending. Such instability is difficult to reconcile with many well-established theories of financial intermediation but is consistent with the relatively recent theories of bank portfolio decisions emphasising cyclical variation in bank leverage and risk-appetite.

Keywords: Bank capital; Interest margins; Bank regulation; Capital requirements

JEL Classification: G01, G18, G28, G32, G38

Suggested Citation

Osborne, Matthew and Fuertes, Ana-Maria and Milne, Alistair K. L., In Good Times and in Bad: Bank Capital Ratios and Lending Rates (December 13, 2014). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1971324 or http://dx.doi.org/10.2139/ssrn.1971324

Matthew Osborne

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ana-Maria Fuertes (Contact Author)

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Alistair K. L. Milne

Loughborough University - School of Business and Economics ( email )

Epinal Way
Loughborough
Leicestershire, LE11 3TU
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
535
Abstract Views
4,005
rank
63,158
PlumX Metrics