But cross-section studies are limited by serious problems of interpretation and measurement. Work in some areas has produced no clear picture of the important patterns in the data, and non-manufacturing industries have not received attention commensurate with their importance. Inter-industry research has taught much about the way markets look, especially within the manufacturing sector in developed economies, even if it has not shown exactly the way markets work. It discusses that tradition has indeed uncovered many stable, robust, and empirical regularities. This chapter discusses inter-industry studies of the relations among various measures of market structure, conduct, and performance. This “leakage” is substantial, amounting to about one‐third of the initial impulse from the regulatory change. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. It is found that regulated banks (UK‐owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements.
In the UK, regulators have imposed time‐varying, bank‐specific minimum capital requirements since Basel I. This paper examines micro evidence-lacking to date-on both questions, using a unique data set. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro‐prudential regimes internationally. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. We also find that tightening LTV limits has larger economic effects than loosening them. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. We rely on a narrative identification approach based on detailed reading of policy-makers’ objectives when implementing the measures. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. However, the effects of such measures on the core objectives of monetary policy to stabilise output and inflation are largely unknown.
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