Silvia Pezzini

The Impact of Capital Requirements on Bank Lending

We estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data set, exploiting variation in individual bank capital requirements in the United Kingdom from 1990-2011. There are two key results. First, regulatory capital requirements affect the capital ratios held by banks – following an increase in capital requirements, banks gradually rebuild the buffers that they initially held over the regulatory minimum. Second, capital requirements affect lending with heterogeneous responses in different sectors of the economy – in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, other corporates and household secured lending. The response of unsecured household lending is smaller and insignificant over the first year as a whole. Loan growth mostly recovers within three years. While estimated over a different policy regime and at the individual bank level, these results may contain some insights into how changing capital requirements might affect lending in a macroprudential regime. However, during the transition to higher global regulatory standards, the effects of changes in capital requirements may be different. For example, increasing capital requirements might augment rather than reduce lending for initially undercapitalised banks.

A New Approach to Assessing Risks to Financial Stability

The Bank’s July 2006 Financial Stability Report (FSR) included a new approach to assessing risks to the stability of the UK financial system. This paper explains the methodology and analysis behind this work and outlines what is being done to improve and extend it. Section 1 of the paper sets out the conceptual rationale for this approach. Section 2 describes its practical implementation in the July 2006 FSR, with further detail on methodology provided in a series of annexes. Section 3 concludes by discussing how this framework is being developed over time to improve the analysis of risks to the UK financial system and to strengthen the management of these risks by the financial sector.

The Role of Freedom, Growth and Religion in the Taste for Revolution

A fundamental question about the determinants of civil conflict is the relative importance of political freedoms versus economic development. This paper takes a new approach to provide an answer by using micro-data based on surveys of revolutionary tastes of 130,000 people living in 61 nations between 1981 and 1997. Controlling for personal characteristics, country and year fixed effects, more freedom and economic growth both reduce revolutionary support. Losing one level of freedom, equivalent to a shift from the US to Turkey, increases support for revolt by 4 percentage points. To reduce support by the same amount requires adding 14 percentage points onto the GDP growth rate. Being Muslim in a free country has no effect on the probability of supporting revolt compared to a non-religious person. However being Muslim in a country that is not free increases it by 13 percentage points. Being Christian in a free country decreases the chance of supporting revolt by 4 percentage points, compared to a non-religious person, and in a not-free country by 1 percentage point.

A First Analysis of Derivatives Data in the Hong Kong Trade Repository

As part of global regulatory reforms, the Hong Kong Monetary Authority started in 2013 to collect derivatives data through the Hong Kong Trade Repository. This article describes the data collected in the month of November 2014 and the patterns observed. Given the limited coverage of the current reporting requirements, the analysis is not meant to be a description of the Hong Kong derivatives market as a whole. The aim is to contribute to the discussion by central banks and researchers on how to bring more transparency to derivatives markets using the data collected by trade repositories.

Freedom and the Taste for Terrorism

Property rights, whose security is often threatened by terrorism and civil conflict, are a necessary condition for the establishment of a market economy. Yet a fundamental and unresolved empirical question is whether the lack of political and civil freedoms is one of the root causes of greater insecurity. This paper takes a new approach to provide an answer by using micro-data on 106,170 people in 61 nations from 1981 to 1997. Controlling for country effects, year effects and endogeneity, the level of freedom has strong and robust negative effects on revolutionary support. A one standard deviation rise in freedom, equivalent to a shift from Argentina to the US, decreases support by 3 percentage points, or 38% of the standard deviation of the proportion of people who want a revolution. Higher GDP growth rates can buy off part of the increase in support when freedoms are constrained. There is also evidence that being religious reduces revolutionary tastes although the size of the effect varies with the extent of freedom and disappears entirely in non-free nations.