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Basel II and Banking Behaviour in a Dualistic Economy

In: The Banks and the Italian Economy

Author

Listed:
  • Mariatiziana Falcone

    (Università della Calabria)

  • Damiano B. Silipo

    (Università della Calabria)

  • Francesco Trivieri

    (Università della Calabria)

Abstract

The chapter deals with the effects of the new capital requirements (Basel II) on banking behaviour. Since the core of the new rules is the greater sensitivity of regulatory capital to the borrowers' risks, we investigated whether banks react to the new rules by differentiating their lending behaviour accordingly. Our theoretical conclusions indicate that as banks switch from Basel I to Basel II rules, they reallocate loans from high-risk to low-risk borrowers, while making interest rates more sensitive to probability of default. An econometric study using Italian data supports both these conclusions. Specifically, we find that as banks adapt to Basel II interest rates on loans do become more sensitive to default risk. In addition, an increase in the interest rate reduces the availability of credit in Southern regions, but increases it in the Centre-North. These results suggest that under Basel II higher-risk firms are likely to pay more for loans, and that firms located in the South are likely to be more severely affected.

Suggested Citation

  • Mariatiziana Falcone & Damiano B. Silipo & Francesco Trivieri, 2009. "Basel II and Banking Behaviour in a Dualistic Economy," Springer Books, in: Damiano Bruno Silipo (ed.), The Banks and the Italian Economy, chapter 0, pages 161-183, Springer.
    • Handle: RePEc:spr:sprchp:978-3-7908-2112-3_8
    DOI: 10.1007/978-3-7908-2112-3_8
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