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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.
|Additional Information:||© 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/|
|Uncontrolled Keywords:||Bank capital; Interest margins; Bank regulation; Capital requirements|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Cass Business School > Faculty of Finance|
Available Versions of this Item
In Good Times and in Bad: Bank Capital Ratios and Lending Rates. (deposited 03 Mar 2016 14:39)
- In Good Times and in Bad: Bank Capital Ratios and Lending Rates. (deposited 19 Jul 2016 15:21) [Currently Displayed]
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