The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks
AbstractIn order to analyze the impact of the new banking capital regulation (Basel II) on the business cycle in an emerging economy, I develop a duopoly model composed of domestic and foreign banks. The principal results are: by the conduct of new banking capital regulation, the assessment of credit risk carried out by an international bank in a given country not only affects the total loans in that country but also the total assets supplied in other countries. Second, analyzing risk-averse banks, as portfolio diversification increases, the change in loans allocated in a given country by an international bank as a proportion of the original investment and the total level of loans for that country can be harshly affected by the behavior of a foreign bank following only “news” through the new capital regulation. Finally, even in the case that portfolio diversification increases without limits, the macroeconomic implication of a change of credit risk estimation, via the new capital regulation, is larger when banks are risk-neutral than risk-averse.
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Bibliographic InfoPaper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/810.
Date of creation: Jun 2005
Date of revision:
Publication status: Published in Revista de Economía del Rosario, 2005, vol. 8, pp.59-83
Market imperfection; Credit; Portfolio choice; Bank regulation;
Find related papers by JEL classification:
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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