The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom
48 Pages Posted: 16 Nov 2016 Last revised: 28 Jun 2021
Date Written: June 22, 2021
We examine how changes in capital requirements and monetary policy shocks affect corporate investment during a credit boom. Our empirical analysis uses data on SMEs in the UK between 1998 and 2006, a period when monetary policy and microprudential regulation were set by independent institutions. We find that an increase in bank-specific capital requirements led to a contraction in corporate debt and investment, but only for firms with short bank relationships. This suggests that relationships between firms and banks are crucial for the transmission of regulatory shocks. Long relationships also attenuate the impact of monetary policy shocks, but to a smaller degree than for capital requirement changes. We also find that the two policies do not dampen or amplify the effect of each other, but their effects vary with the size of banks’ capital buffers and the creditworthiness of firms.
Keywords: Capital requirements, monetary policy shocks, real effects, relationship lending
JEL Classification: G21, G28, E51
Suggested Citation: Suggested Citation