The international transmission of bank capital requirements: Evidence from the UK $ Shekhar Aiyar a , Charles W. Calomiris b,n , John Hooley a,1 , Yevgeniya Korniyenko a,1 , Tomasz Wieladek c a International Monetary Fund, WA DC, USA b Columbia Business School, 3022 Broadway, Manhattan, NY 10027, USA c Bank of England, Threadneedle Street, London EC2R 8AH, UK article info Article history: Received 3 May 2013 Received in revised form 4 September 2013 Accepted 18 September 2013 JEL classification: G21 G18 E51 E52 E44 Keywords: Cross-border lending Loan supply Capital requirements International transmission abstract We use data on UK banks' minimum capital requirements to study the impact of changes to bank-specific capital requirements on cross-border bank loan supply from 1999Q1 to 2006Q4. By examining a sample in which each recipient country has multiple relation- ships with UK-resident banks, we are able to control for demand effects. We find a negative and statistically significant effect of changes to banks' capital requirements on cross-border lending: a 100 basis point increase in the requirement is associated with a reduction in the growth rate of cross-border credit of 5.5 percentage points. We also find that banks tend to favor their most important country relationships, so that the negative cross-border credit supply response in “core” countries is significantly less than in others. Banks tend to cut back cross-border credit to other banks (including foreign affiliates) more than to firms and households, consistent with shorter maturity, wholesale lending which is easier to roll off and may be associated with weaker borrowing relationships. & 2014 Elsevier B.V. All rights reserved. 1. Introduction It is well documented that globalized banks transmit balance sheet shocks across borders. Cetorelli and Goldberg (2011) show that during the global financial crisis, liquidity shocks to banking systems in advanced countries caused a contraction in lending to emerging markets. Aiyar (2011, 2012) and Hoggarth, Hooley, and Korniyenko (2013) document that foreign banks withdrew funding from UK-resident banks during the crisis, contri- buting to a contraction in domestic lending. De Haas and Van Horen (2013) show that cross-border retrenchment by banks was particularly severe in countries where the bank was less integrated in the local banking system. And ample Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/jfec Journal of Financial Economics http://dx.doi.org/10.1016/j.jfineco.2014.05.003 0304-405X/& 2014 Elsevier B.V. All rights reserved. ☆ We are grateful to Phil Strahan, Heitor Almeida, Viral Acharya, other NBER conference participants, and an anonymous referee for comments on a prior draft, and to Mark Robson and the other staff of the Bank of England’s Monetary and Financial Statistics Division for making the data on UK banks available to us and for helping us to access the data. This paper should not be construed as representing the opinions of the Bank of England, the IMF, or any other organization. All errors and omissions remain our own. n Corresponding author. E-mail addresses: saiyar@imf.org (S. Aiyar), cc374@columbia.edu (C.W. Calomiris), jhooley@imf.org (J. Hooley), ykorniyenko@imf.org (Y. Korniyenko), tomasz.wieladek@bankofengland.co.uk (T. Wieladek). 1 Currently International Monetary Fund but completed this work while at the Bank of England. Journal of Financial Economics ] (]]]]) ]]]–]]] Please cite this article as: Aiyar, S., et al., The international transmission of bank capital requirements: Evidence from the UK. Journal of Financial Economics (2014), http://dx.doi.org/10.1016/j.jfineco.2014.05.003i