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The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks

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  • Sebastián Nieto

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    Abstract

    In order to analyze the impact of the new banking capital regulation (Basel II) on the business cycle in an emerging economy, I develop a duopoly model composed of domestic and foreign banks. The principal results are: by the conduct of new banking capital regulation, the assessment of credit risk carried out by an international bank in a given country not only affects the total loans in that country but also the total assets supplied in other countries. Second, analyzing risk-averse banks, as portfolio diversification increases, the change in loans allocated in a given country by an international bank as a proportion of the original investment and the total level of loans for that country can be harshly affected by the behavior of a foreign bank following only news" through the new capital regulation. Finally, even in the case that portfolio diversification increases without limits, the macroeconomic implication of a change of credit risk estimation, via the new capital regulation, is larger when banks are risk-neutral than risk-averse."

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    Article provided by UNIVERSIDAD DEL ROSARIO in its journal REVISTA DE ECONOMÍA DEL ROSARIO.

    Volume (Year): (2005)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:col:000151:003609

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    Keywords: Market imperfection; Credit; Portfolio choice; Banking regulation;

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    15. Krainer, Robert E., 2002. "Banking in a theory of the business cycle: a model and critique of the Basle Accord on risk-based capital requirements for banks," International Review of Law and Economics, Elsevier, Elsevier, vol. 21(4), pages 413-433, May.
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