Tag Archives: credit substitution

Unintended consequences of higher capital requirements

Arzu Uluc and Tomasz Wieladek.

Following the global financial crisis of 2007-08, financial reform introduced time-varying capital requirements to raise the resilience of the financial system. But do we really understand how this policy works and the impact it is likely to have on UK banks’ largest activity, mortgage lending? In a recent paper we investigated the UK experience of time-varying microprudential capital requirements before the financial crisis. We found that an increase in this requirement intended to make a bank more resilient actually induced it to shift into riskier mortgage lending.

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Filed under Banking, Financial Stability, Macroprudential Regulation, Microprudential Regulation