OSBORNE, M., FUERTES, A-M. and MILNE, A., 2017. In good times and in bad: bank capital ratios and lending rates. International Review of Financial Analysis, 51, pp.102-112.
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.
This paper was accepted for publication in the journal International Review of Financial Analysis and the definitive published version is available at http://dx.doi.org/10.1016/j.irfa.2016.02.005