The FSA has published No. 36 in its Occasional Paper series, Bank regulation, capital and credit supply: Measuring the impact of prudential standards.

The object of the FSA’s Occasional Paper series, which covers topics such as the rationale for regulation, the costs and benefits of various aspects of regulation, and the structure and development of the financial services industry, is to encourage debate among academics, practitioners and policy-makers.

This paper looks at evidence for the existence of a "bank capital channel" in the UK lending market. The existence of such a channel requires:

  • That banks do not have excess capital with which to insulate credit supply from regulatory changes.
  • Raising capital is costly for banks.
  • Firms and consumers in the economy are to some extent dependent on banks for credit.

The broad conclusion of the study is that while the imposition of tighter standards may produce significant benefits such as greater financial stability and a lower probability of crisis events, they may also have costs in terms of reduced loan supply.

View Bank regulation, capital and credit supply: Measuring the impact of prudential standards, 21 September 2009