DP11265 The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom

Author(s): Filippo De Marco, Tomasz Wieladek
Publication Date: May 2016
Keyword(s): Capital requirements, Firm-level real effects, prudential and monetary policy, relationship lending, SMEs
JEL(s): E51, G21, G28
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11265

We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs' asset growth contracts by 6.9% in the first year of a new bank-firm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.