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Loan interest rates under risk-based capital requirements: The impact of banking market structure

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  • Drumond, Inês
  • Jorge, José

Abstract

This paper analyzes how the effects of the introduction of risk-based bank capital requirements on bank loan rates depend on the market structure of the banking industry. We show that, when granting loans to borrowers under Basel II or Basel III capital requirements, banks with market power internalize an additional cost, in terms of regulatory capital, associated with the increase of borrowers' risk of default. As a result, the intermediation margin on bank loans increases with the changeover from non-risk to risk-based capital requirements, thereby making lending more expensive.

Suggested Citation

  • Drumond, Inês & Jorge, José, 2013. "Loan interest rates under risk-based capital requirements: The impact of banking market structure," Economic Modelling, Elsevier, vol. 32(C), pages 602-607.
  • Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:602-607
    DOI: 10.1016/j.econmod.2013.02.017
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    References listed on IDEAS

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    Cited by:

    1. Marrouch, Walid & Turk-Ariss, Rima, 2014. "Joint market power in banking: Evidence from developing countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 253-267.

    More about this item

    Keywords

    Risk-based capital requirements; Basel accord; Imperfect competition;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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