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A model of bank capital, lending and the macroeconomy: Basel I versus Basel II

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  • Lea Zicchino

Abstract

The revised framework for capital regulation of internationally active banks (known as Basel II) introduces risk-based capital requirements. This paper analyses the relationship between bank capital, lending and macroeconomic activity under the new capital adequacy regime. It extends a model of the bank-capital channel of monetary policy - developed by Chami and Cosimano - by introducing capital constraints . la Basel II. The results suggest that bank capital is likely to be less variable under the new capital adequacy regime than under the current one, which is characterised by invariant asset risk-weights. However, bank lending is likely to be more responsive to macroeconomic shocks.

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Paper provided by Bank of England in its series Bank of England working papers with number 270.

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Date of creation: Aug 2005
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Handle: RePEc:boe:boeewp:270

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  1. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 415-436, October.
  2. Anil Kashyap & Jeremy C. Stein, 2004. "Cyclical implications of the Basel II capital standards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 18-31.
  3. Skander J. Van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 259-265.
  4. Dimitrios Tsomocos, 2003. "Equilibrium Analysis, Banking, Contagion and Financial Fragility," OFRC Working Papers Series 2003fe03, Oxford Financial Research Centre.
  5. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios Tsomocos, 2005. "Procyclicality and the new Basel Accord - banks’ choice of loan rating system," Economic Theory, Springer, Springer, vol. 26(3), pages 537-557, October.
  6. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
  7. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers, Society for Economic Dynamics 512, Society for Economic Dynamics.
  8. Hancock, Diana & Laing, Andrew J. & Wilcox, James A., 1995. "Bank capital shocks: Dynamic effects on securities, loans, and capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 661-677, June.
  9. Chami, Ralph & Cosimano, Thomas F., 2010. "Monetary policy with a touch of Basel," Journal of Economics and Business, Elsevier, Elsevier, vol. 62(3), pages 161-175, May.
  10. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 15(3), pages 395-417, July.
  11. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers 132, Bank of England.
  12. Joseph G. Haubrich & Paul Wachtel, 1993. "Capital requirements and shifts in commercial bank portfolios," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-15.
  13. Robert R. Bliss & George G. Kaufman, 2002. "Bank procyclicality, credit crunches, and asymmetric monetary policy effects: a unifying model," Working Paper Series, Federal Reserve Bank of Chicago WP-02-18, Federal Reserve Bank of Chicago.
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Cited by:
  1. Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto.
  2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2011. "Cyclical Effects of Bank Capital Requirements with Imperfect Credit Markets," Working Papers Series, Central Bank of Brazil, Research Department 234, Central Bank of Brazil, Research Department.
  3. Pierre-Richard Agenor & Koray Alper & Luiz Pereira da Silva, 2012. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers 1228, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  4. Ralph Chami & Thomas F. Cosimano, 2001. "Monetary Policy with a touch of Basel," IMF Working Papers 01/151, International Monetary Fund.
  5. Bouvatier, Vincent & Lepetit, Laetitia, 2008. "Banks' procyclical behavior: Does provisioning matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 18(5), pages 513-526, December.
  6. Vincent Bouvatier & Laetitia Lepetit, 2006. "Banks' procyclicality behavior : does provisioning matter ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00115622, HAL.
  7. Bouvatier, Vincent & Lepetit, Laetitia, 2012. "Provisioning rules and bank lending: A theoretical model," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(1), pages 25-31.
  8. Ines Drumond & José Jorge, 2009. "Basel II Capital Requirements, Firms' Heterogeneity, and the Business Cycle," FEP Working Papers 307, Universidade do Porto, Faculdade de Economia do Porto.
  9. Tommaso Trani, 2012. "Countercyclical Capital Regulation and Bank Ownership Structure," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 14-2012, Economics Section, The Graduate Institute of International Studies.
  10. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
  11. Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
  12. David VanHoose, 2008. "Bank Capital Regulation, Economic Stability, and Monetary Policy: What Does the Academic Literature Tell Us?," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 36(1), pages 1-14, March.

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