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Basel III and Credit Crunch: An Empirical Test with Focus on Europe

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  • Mario Mustilli
  • Francesco Campanella
  • Eugenio D’Angelo

Abstract

The aim of this research is to show that unless the lending business is incentivised by an appreciable earnings potential the effect of the enforcement of the Basel III capital and liquidity requirements is sure to be a credit crunch. Initially, this empirical research hypothesis was tested against a number of independent variables reflecting trends in lending volumes; subsequently, these variables were used to establish if the risks of default that corporate borrowers face under the impact of credit rationing are likely to be heightened by other factors. The research sample is a set of 2,964 banks operating in Europe in 2014. The values used to construct the variables were taken from the Bankscope (Bureau Van Dijk) and Datastream (Thomson Reuters) databases and from the end-2014 actuals of these banks. Based on their test results, the authors conclude that the need to comply with the newly-enforced Basel III requirements is responsible for a fall in aggregate bank lending and the prioritisation of forms of investment other than the lending business (for example, financial market transactions).JEL classification numbers: G21, G28Keywords: Basel III, Credit crunch, Capital requirement, Liquidity requirement, Value at risk, Operational risk.

Suggested Citation

  • Mario Mustilli & Francesco Campanella & Eugenio D’Angelo, 2017. "Basel III and Credit Crunch: An Empirical Test with Focus on Europe," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(3), pages 1-3.
    • Handle: RePEc:spt:apfiba:v:7:y:2017:i:3:f:7_3_3
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    References listed on IDEAS

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    2. Chenzi Yang & Fernando Moreira & Thomas Welsh Archibald, 2023. "Community banks' capital requirements and regional housing tenure," Australian Economic Papers, Wiley Blackwell, vol. 62(4), pages 723-746, December.
    3. Mario Mustilli & Francesco Campanella & Eugenio D¡¯Angelo, 2018. "Measuring Determinants and Effects of Firms¡¯ Financial Structure in a Deleverage Setting: Evidence From Italy," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(2), pages 23-30, April.

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    More about this item

    Keywords

    basel iii; credit crunch; capital requirement; liquidity requirement; value at risk; operational risk.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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