A new working paper from the Bank of England has examined the effects of changes in capital requirements as a macro-prudential tool for smoothing the credit cycle. It notes that heightening capital requirements is only effective if there is no ‘leakage’, that is, aggregate credit supply will only diminish if non-UK-regulated banks do not react by increasing their lending as a result of the advantage gained by not being subject to UK-imposed capital changes. The paper examines data from 1998 to 2007, and finds a large and significant impact of changes to minimum capital requirements for UK-regulated banks on the rate of lending growth. It also finds a material although only partial increase in lending by non-UK-regulated banks. Thus, while there is some leakage, changes to minimum capital are on balance a useful tool. However, the potential for leakage suggests the need for close coordination between countries to prevent regulatory arbitrage, and make macro-prudential supervision effective.