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The Impact of Basel III on Lending Rates of EU Banks

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Abstract

In this paper we focus on practical aspects of the new framework for banking regulation in the European Union as defined in Basel III and Capital Requirements Directive IV. We employ a simultaneous equations model where banks choose the optimal level of capital, which is seen as a call option. In our modeling, we employ data on 594 banks in the European Union during the 2006–2011 period. Our results predict a modest drop in the level of loans provided of about 2% from the current level. The drop in loans is not expected to be large because (i) many European banks are already complying with the capital requirements even though they are not yet fully compulsory, (ii) the impact of a one percentage point increase in the common equity ratio should lead to an increase in lending rates of only 18.8 basis points, and (iii) the elasticity of demand for loans in the EU is reported to be relatively low. Taking into consideration the seven-year implementation period for the new capital requirements, the impacts should not be very perceptible for the EU economies.

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  • Barbora SUTOROVA & Petr TEPLY, 2013. "The Impact of Basel III on Lending Rates of EU Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(3), pages 226-243, July.
    • Handle: RePEc:fau:fauart:v:63:y:2013:i:3:p:226-243
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    More about this item

    Keywords

    Basel III; bank; capital requirements; EU; lending rates; regulation;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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