Bank of England: International Coordination Needed to Prevent Macroprudential ‘Leakage’
Date: 27 January 2012
Source: Bank of England
A new working paper from the Bank of England has examined the effects of changes in capital requirements as a macroprudential tool for smoothing the credit cycle. It notes that heightening capital requirements is only effective if there is no “leakage”; that is, aggregate credit supply will only diminish if non-UK-regulated banks do not react by increasing their lending as a result of the advantage gained by not being subject to UK-imposed capital changes. The paper examines data from 1998 to 2007, and finds a “large and significant impact” of changes to minimum capital requirements for UK-regulated banks on the rate of lending growth. It also finds a “material although only partial” increase in lending by non-UK-regulated banks. Thus, while there is some leakage, changes to minimum capital are on balance a useful tool. However, the potential for leakage suggests the need for close coordination between countries to prevent regulatory arbitrage, and make macroprudential supervision effective.