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Bank Behavior in Response to Basel Iii

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Author Info

  • Thomas F. Cosimano
  • Dalia Hakura

Abstract

This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/119.

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Length: 34
Date of creation: 01 May 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/119

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Related research

Keywords: Commercial banks; Bank supervision; Monetary policy; Banking sector; Basel Core Principles; Developed countries; Economic models; banking; banking crisis; interest expense; bank capital; crisis countries; financial crisis; return on equity; bank holding; banking crises; bank holding companies; bank profitability; bank equity; net interest margin; capital requirement; bank of international settlements; capital adequacy; financial crises; banking system; bank loans; bank lending; bank behavior; bank lending rates; banking supervisors; banks loans; bank regulation; bank data; tier 1 capital; loan loss provision; systemic banking crisis; capital regulation; return on assets; systemic financial crises; banking systems; monetary authority; risk weighted asset; bank borrowing; deposit guarantee; bank holding company; too big to fail ? banks; crisis episodes; resolution of banking crises; bank deposits; bank assets; systemic risk; bankruptcies; central banking; debt financing; bank capital standards; bank management; nonperforming loan; banking industry; bank reserves; deposit guarantee schemes; holding company; bank issues; bank for international settlements;

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References

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  1. Angelini, P. & Clerc, L. & Cúrdia, V. & Gambacorta, L. & Gerali, A. & Locarno, A. & Motto, R. & Roeger, W. & Van den Heuvel, S. & Vlcek, J., 2011. "BASEL III: Long-term impact on economic performance and fluctuations," Working papers 323, Banque de France.
  2. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
  3. Ho, Tai-Kuang & von Hagen, Jürgen, 2004. "Money Market Pressure and the Determinants of Banking Crises," CEPR Discussion Papers 4651, C.E.P.R. Discussion Papers.
  4. William Francis & Matthew Osborne, 2009. "Bank regulation, capital and credit supply: Measuring the Impact of Prudential Standards," Occasional Papers 36, Financial Services Authority.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  6. Mark J. Flannery & Kasturi P. Rangan, 2008. "What Caused the Bank Capital Build-up of the 1990s?," Review of Finance, European Finance Association, vol. 12(2), pages 391-429.
  7. Patrick Slovik & Boris Cournède, 2011. "Macroeconomic Impact of Basel III," OECD Economics Department Working Papers 844, OECD Publishing.
  8. Dalia Hakura & Ralph Chami & Thomas F. Cosimano & Adolfo Barajas, 2010. "U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis," IMF Working Papers 10/131, International Monetary Fund.
  9. Ralph Chami & Thomas F. Cosimano, 2001. "Monetary Policy with a touch of Basel," IMF Working Papers 01/151, International Monetary Fund.
  10. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  11. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
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Citations

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Cited by:
  1. Hartmann-Wendels, Thomas, 2012. "Regulatorische Folgen der Finanzkrisen: Auswirkungen auf die Leasing-Branche," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 10(1), pages 3-88.
  2. Schaetzle, Dominik, 2012. "Die Auswirkungen der neuen Eigenkapitalanforderungen nach Basel III: Eine Analyse empirischer Studien," Arbeitspapiere 124, Westfälsche Wilhelms-Universität Münster (WWU), Institut für Genossenschaftswesen.
  3. Noss, Joseph & Toffano, Priscilla, 2014. "Estimating the impact of changes in aggregate bank capital requirements during an upswing," Bank of England working papers 494, Bank of England.

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