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The impact of Basel I capital regulation on bank deposits and loans: Empirical evidence for Europe

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  • Birgit Schmitz

    (IIW Institute for International Economics University of Bonn)

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    Abstract

    The Basel Committee on Banking and Supervision established minimum capital requirements for banks in their 1988 Capital Accord. This capital regulation was adopted for European Union banks at the beginning of 1993. After the implementation, a widespread concern emerged about the possible negative impact that higher capital requirements could exert on the level of economic activity, especially on bank lending. This paper investigates the impact of the Basel Accord on bank deposits and loans for eight European countries. We follow the approach taken by Peek and Rosengren (1995a) and test for the regulatory effect in a panel structure with about 2500 individual bank balance sheets for the years 1993-1995. We find that changes in deposits are positively correlated with changes in capital. Lower-capitalized banks show a stronger response to a change in capital than their higher-capitalized competitors. This evidence is consistent with the hypothesis that the implementation of minimum capital requirements had a negative effect on the supply of bank loans

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    Bibliographic Info

    Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 42.

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    Date of creation: 02 Feb 2007
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    Handle: RePEc:mmf:mmfc06:42

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    Web page: http://www.essex.ac.uk/afm/mmf/index.html

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    Keywords: Bank capital regulation; Basel Accord of 1988; EU Banking;

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    8. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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