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Mapping capital and liquidity requirements to bank lending spreads

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  • Michael R King

Abstract

This study outlines a methodology for mapping the increases in capital and liquidity requirements proposed under Basel III to bank lending spreads. The higher cost associated with a one percentage point increase in the capital ratio can be recovered by increasing lending spreads by 15 basis points for a representative bank. This calculation assumes the return on equity (ROE) and the cost of debt are unchanged, with no change in other sources of income and no reduction in operating expenses. If ROE and the cost of debt are assumed to decline, the impact on lending spreads is reduced. To recover the additional cost of meeting the December 2009 proposal for the Net Stable Funding Ratio (NSFR), a representative bank would need to increase lending spreads by 24 basis points. Taking into account the fall in risk-weighted assets from holding more government bonds reduces this cost to 12 basis points or less.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 324.

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Length: 35 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:bis:biswps:324

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Related research

Keywords: banks; regulation; Basel III; capital; liquidity; lending spreads;

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Cited by:
  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," Questioni di Economia e Finanza (Occasional Papers) 87, Bank of Italy, Economic Research and International Relations Area.
  2. Claudio Borio, 2011. "Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward," BIS Working Papers 354, Bank for International Settlements.
  3. Alfredo Martin-Oliver & Sonia Ruano & Vicente Salas-Fumas, 2013. "Banks' Equity Capital Frictions, Capital Ratios, and Interest Rates: Evidence from Spanish Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 183-225, March.
  4. Douglas Elliott & Andre Santos, 2012. "Assessing the Cost of Financial Regulation," IMF Working Papers 12/233, International Monetary Fund.
  5. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
  6. 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.
  7. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.
  8. Milan Matejašák & Petr Teplý, 2013. "Are Credit Unions Dynamite on the Czech Financial Market?," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(1).
  9. Kapan, Tümer & Minoiu, Camelia, 2013. "Balance sheet strength and bank lending during the global financial crisis," Discussion Papers 33/2013, Deutsche Bundesbank, Research Centre.

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