Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords
AbstractThis paper examines the cyclical e¤ects of bank capital requirements in a simple macro model with credit market frictions. A bank capital channel is introduced through a monitoring incentive effect of bank capital buffers on the repayment probability and hence the loan rate. We also identify a collateral channel, which mitigates moral hazard behaviour by firms, and therefore raises their repayment probability. Basel I and Basel II regulatory regimes are then defined, with a distinction made between the Standardized and Foundation Internal Ratings Based (IRB) approaches of Basel II. We analyze the role of the bank capital and collateral channels in the transmission of supply shocks, and show that depending on the strength of these channels, the loan rate can either amplify or mitigate the e¤ects of the shock. Finally, the relative impact of the two channels also determines which of the regulatory regimes is most procyclical.
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Bibliographic InfoPaper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 161.
Length: 41 pages
Date of creation: 2012
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-08 (All new papers)
- NEP-BAN-2012-03-08 (Banking)
- NEP-CBA-2012-03-08 (Central Banking)
- NEP-CTA-2012-03-08 (Contract Theory & Applications)
- NEP-RMG-2012-03-08 (Risk Management)
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