Basel III joint regulatory constraints: interactions and implications for the financing of the economy

This paper examines the impact of multiple regulatory constraints on the financing of the economy in the context of the implementation of the Basel III regulation on capital and liquidity. We propose a simple theoretical model of bank lending decision to analyse the interactions between these various regulatory requirements and the conditions under which some constraints may bind while others may not. Building on the predictions of this theoretical model, we estimate the impact of these different regulatory requirements on lending growth, on a panel of 54 French banks since 2014. Our results indicate that four pairwise interactions, most of them involving the leverage ratio, have a significant effect on lending growth. We also emphasize that the regulatory ratios interact more for banks with lower regulatory ratios and in periods of financial stress. More specifically, our results highlight a significant relationship of partial substitutability between the leverage ratio, the LCR and the NSFR for such banks in such periods, resulting from the positive effect of bank own funds on liquidity.