In Good Times and in Bad: Bank Capital Ratios and Lending Rates
35 Pages Posted: 12 Dec 2011 Last revised: 10 Feb 2016
Date Written: December 13, 2014
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: Suggested Citation