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Capital shocks, bank asset allocation, and the revised Basel Accord

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  • Jacques, Kevin T.
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    Abstract

    In contrast to the 1988 Basel Accord (Basel I), the revised risk-based capital standards (Basel II) propose regulatory capital requirements based on credit ratings. This paper develops a theoretical model to analyze how banks will adjust their low and high credit risk commercial loans under the proposed newer standard. Capital-constrained banks respond to an adverse capital shock by reducing high credit risk loans, while under certain circumstances, low credit risk loans may actually increase. When compared to Basel I, it is shown that high-risk loans are reduced more under Basel II, but whether a bank reduces total lending more under Basel I or under the revised standards depends on a complex interaction of factors.

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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 17 (2008)
    Issue (Month): 2 ()
    Pages: 79-91

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    Handle: RePEc:eee:revfin:v:17:y:2008:i:2:p:79-91

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    Web page: http://www.elsevier.com/locate/inca/620170

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    Cited by:
    1. Said, Fathin Faizah, 2013. "The dynamic of bank lending channel: Basel regulatory constraint," Economic Modelling, Elsevier, vol. 31(C), pages 606-613.
    2. Maurin, Laurent & Toivanen, Mervi, 2012. "Risk, capital buffer and bank lending: a granular approach to the adjustment of euro area banks," Working Paper Series 1499, European Central Bank.

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