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The Impact of Basel III on Lending Rates of EU Banks

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Abstract

In this paper we focus on practical aspects of the new framework for banking regulation in the European Union as defined in Basel III and Capital Requirements Directive IV. We employ a simultaneous equations model where banks choose the optimal level of capital, which is seen as a call option. In our modeling, we employ data on 594 banks in the European Union during the 2006–2011 period. Our results predict a modest drop in the level of loans provided of about 2% from the current level. The drop in loans is not expected to be large because (i) many European banks are already complying with the capital requirements even though they are not yet fully compulsory, (ii) the impact of a one percentage point increase in the common equity ratio should lead to an increase in lending rates of only 18.8 basis points, and (iii) the elasticity of demand for loans in the EU is reported to be relatively low. Taking into consideration the seven-year implementation period for the new capital requirements, the impacts should not be very perceptible for the EU economies.

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  • Barbora SUTOROVA & Petr TEPLY, 2013. "The Impact of Basel III on Lending Rates of EU Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(3), pages 226-243, July.
    • Handle: RePEc:fau:fauart:v:63:y:2013:i:3:p:226-243
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    1. Chami, Ralph & Cosimano, Thomas F., 2010. "Monetary policy with a touch of Basel," Journal of Economics and Business, Elsevier, vol. 62(3), pages 161-175, May.
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    Cited by:

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    2. Tomas Klinger & Petr Teply, 2016. "The Nexus Between Systemic Risk and Sovereign Crises," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 50-69, February.
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    5. Imad Kutum & Khaled Hussainey, 2014. "Are Canadian Banks Ready for Basel III?," Accounting and Finance Research, Sciedu Press, vol. 3(3), pages 159-159, August.
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    7. Olivier de BANDT & Mohammed CHAHAD, 2018. "A DGSE model to assess the post-crisis regulation of universal banks," Rue de la Banque, Banque de France, issue 67, September.
    8. Jutasompakorn, Pearpilai & Lim, Chu Yeong & Ranasinghe, Tharindra & Ow Yong, Kevin, 2021. "Impact of Basel III on the discretion and timeliness of Banks’ loan loss provisions," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(2).
    9. Karel Janda & Pavel Zetek, 2015. "Mikrofinanční revoluce: kontroverze a výzvy [Microfinance Revolution: Controversies and Challenges]," Politická ekonomie, Prague University of Economics and Business, vol. 2015(1), pages 108-130.
    10. Dominika Ehrenbergerová & Martin Hodula & Zuzana Gric, 2022. "Does capital-based regulation affect bank pricing policy?," Journal of Regulatory Economics, Springer, vol. 61(2), pages 135-167, April.
    11. Martin Birn & Olivier de Bandt & Simon Firestone & Matías Gutiérrez Girault & Diana Hancock & Tord Krogh & Hitoshi Mio & Donald P. Morgan & Ajay Palvia & Valerio Scalone & Michael Straughan & Arzu Ulu, 2020. "The Costs and Benefits of Bank Capital—A Review of the Literature," JRFM, MDPI, vol. 13(4), pages 1-25, April.
    12. Hai Long Pham & Kevin James Daly, 2020. "The Impact of BASEL Accords on the Management of Vietnamese Commercial Banks," JRFM, MDPI, vol. 13(10), pages 1-13, September.
    13. Bank for International Settlements, 2019. "The costs and benefits of bank capital - a review of the literature," BCBS Working Papers 37, Bank for International Settlements.
    14. Stijn Ferrari & Mara Pirovano & Pablo Rovira Kaltwasser, 2016. "The impact of sectoral macroprudential capital requirements on mortgage loan pricing: Evidence from the Belgian risk weight add-on," Working Paper Research 306, National Bank of Belgium.
    15. Matthieu Darracq Paries & Peter Karadi & Christoffer Kok & Kalin Nikolov, 2022. "The Impact of Capital Requirements on the Macroeconomy: Lessons from Four Macroeconomic Models of the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-50, December.
    16. Ilona Sobien, 2022. "Znaczenie wymogow kapitalowych w sektorze bankowym (The Importance of Capital Requirements in the Banking Sector)," Research Reports, University of Warsaw, Faculty of Management, vol. 1(36), pages 15-28.
    17. Bank for International Settlements, 2016. "Literature review on integration of regulatory capital and liquidity instruments," BCBS Working Papers 30, Bank for International Settlements.
    18. Bank for International Settlements, 2025. "Bank capital and balance sheet management during times of distress: international evidence (July 2025, revised August 2025)," BCBS Working Papers 46, Bank for International Settlements.

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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