Shocks to bank capital: evidence from UK banks at home and away Nada Mora(1) and Andrew Logan(2) This paper assesses how shocks to bank capital may influence a bank’s portfolio behaviour using novel evidence from a UK bank panel data set from a period that pre-dates the recent financial crisis. Focusing on the behaviour of bank loans, we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer. We find that innovations in a bank’s capital in this (pre-crisis) sample period were coupled with a loan response that lasted up to three years. Banks also responded to scarce regulatory capital by raising their deposit rate to attract funds. The international presence of UK banks allows us to identify a specific driver of capital shocks in our data, independent of bank lending to UK residents. Specifically, we use write-offs on loans to non-residents to instrument bank capital’s impact on UK resident lending. A fall in capital brought about a significant drop in lending, in particular to private non-financial corporations. In contrast, household lending increased when capital fell, which may indicate that — in this pre-crisis period — banks substituted into less risky assets when capital was short.

ACKNOWLEDGEMENTS A study that has taken so long in the making owes its debt to many people. Among those who helped is my supervisor, Associate Professor Dr. Kevin Daly, who has taken very keen interest in my run towards this milestone, even at times when I would waver in my research efforts. He has not only been my supervisor, he has been a very good friend and colleague, ready to help in all aspects of research, and in my personal life. Kevin’s efforts are especially worth mentioning as he helped me integrate into the academic life, after I had been away from it for over ten years working in the banking industry. A special debt of gratitude is owed to my co-supervisor, Associate Professor Dr. Craig Ellis, who provided invaluable help in my research, and with the thesis editing, and to my thesis Examiner Prof. Tom Valentine for providing me with an excellent feedback on my thesis. My colleagues, Salem Akhter, Zulfan Tadjoeddin, Gazi Mainul Hassan, and Anil Mishra at the School of Economics and Finance, UWS provided valuable suggestions for my thesis. I also thank the school staff, especially Nikki Gallaway for keeping my office up and running. I have also benefited greatly from the numerous suggestions and comments from participants at conferences held in Queenstown, Hawaii, Melbourne, Sydney and Karachi, where my research was presented during my PhD candidature. It was at these conferences that I met Dr.