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

Osborne, M., Fuertes, A. & Milne, A. (2016). In Good Times and in Bad: Bank Capital Ratios and Lending Rates. International Review of Financial Analysis, doi: 10.1016/j.irfa.2016.02.005

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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.

Publication Type: Article
Additional Information: © 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
Publisher Keywords: Bank capital; Interest margins; Bank regulation; Capital requirements
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance

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