Does Macro-Prudential Regulation Leak? Evidence from a UK Policy Experiment





  • The views expressed in this paper are those of the authors, and not necessarily those of the Bank of England or the International Monetary Fund. We are grateful to Joseph Peek, Jacob de Haan, an anonymous referee, Charles Goodhart, Helene Rey, Richard Portes, Lucrezia Reichlin, Glenn Hoggarth, David Aikman, Andy Haldane, Martin Brooke, Franziska Ohnsorge, Jeromin Zettlemeyer, and seminar participants at the Bank of England, London School of Economics, London Business School, EBRD, Columbia University, Cornell, Wharton, Dartmouth, Yale, LSU, Tulane, Clemson, the Chicago Fed, the Bank of Spain, Bocconi University, and the IMF for valuable comments. All errors and omissions remain our own.


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 data set. 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.