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Banks’ reactions to Basel-III

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  • Paolo Angelini

    ()
    (Bank of Italy)

  • Andrea Gerali

    ()
    (Bank of Italy)

Abstract

We use a dynamic general equilibrium model of the euro area to study banks’ possible responses to the stricter capital requirements called for by the Basel III reform package. We show that the effects on output depend, inter alia, on the strategy banks adopt in response to the reform, and that banks tend to prefer some strategies over others. Specifically, an increase in loan spreads minimizes banks’ costs and induces the sharpest contraction in real activity and investment, in the immediate as well as long term. A recapitalization, or restrictions on dividends, have more modest effects on output, but are less likely to be preferred by banks. We also find that the undesired macroeconomic effects of the reform during the transition phase are significantly mitigated if the reform is announced well ahead of its actual implementation – as was done for the Basel III package.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 876.

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Date of creation: Jul 2012
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Handle: RePEc:bdi:wptemi:td_876_12

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Web page: http://www.bancaditalia.it
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Related research

Keywords: Basel III; capital requirements; macroprudential policy; banks.;

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  1. Paolo Angelini & Laurent Clerc & Vasco Cúrdia & Leonardo Gambacorta & Andrea Gerali & Alberto Locarno & Roberto Motto & Werner Roeger & Skander Van den Heuvel & Jan Vlcek, 2011. "BASEL III: long-term impact on economic performance and fluctuations," Staff Reports 485, Federal Reserve Bank of New York.
  2. Rafael Repullo & Javier Suarez, 2008. "The Procyclical Effects Of Basel Ii," Working Papers wp2008_0809, CEMFI.
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