The Bank of England published a staff working paper assessing how changes in prudential capital requirements affect UK lending, macroeconomic outcomes and banking competition. Using UK data, the paper finds banks mainly meet tighter requirements by reducing risk-weighted assets rather than raising new equity, producing modest short-run contractions in lending and GDP with negligible long-run costs, alongside a temporary reduction in competition. The analysis uses a structural VAR with sign and narrative restrictions anchored to the UK Prudential Regulation Authority’s 2014 and 2015 concurrent stress tests and the 2016 annual cyclical scenario, estimated on quarterly data from 1991 to 2023 (excluding 2020 and 2021). A prudential capital shock normalised to raise the Tier 1 ratio by 1 percentage point is associated with an initial increase in Tier 1 capital of about 0.50% and a more persistent decline in risk-weighted assets of about 0.50% over four to eight quarters, with corporate lending falling by around 0.25% (after six quarters) and household secured lending by around 0.05% (after four quarters), and spreads rising by 1 to 2 basis points. GDP falls by up to about 0.2% after four quarters and stays negative for roughly six to eight quarters, with state dependence showing larger but shorter-lived contractions and faster recoveries when tightening occurs in recessions than in expansions. Competition metrics (Boone indicator, Herfindahl-Hirschman Index and Lerner Index) indicate tighter requirements temporarily reduce competition, and the historical decomposition suggests the 2015 stress test episode had the largest estimated effects, including a near 34 basis point Tier 1 ratio gain, corporate lending down around 0.60% and GDP down around 0.32%. As a staff working paper, the publication is positioned as research in progress intended to elicit comments and does not represent Bank of England policy.
Bank of England 2026-02-27
Bank of England staff paper finds higher bank capital requirements have modest short-run output costs and temporarily reduce competition
The Bank of England released a staff working paper analyzing the impact of changes in prudential capital requirements on UK lending, macroeconomic outcomes, and banking competition. The study finds banks primarily meet tighter requirements by reducing risk-weighted assets, leading to modest short-term contractions in lending and GDP, with minimal long-term costs and a temporary reduction in competition. The paper is research in progress and does not reflect official Bank of England policy.