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Bank Behavior in Response to Basel Iii: A Cross-Country Analysis

  • Thomas F. Cosimano
  • Dalia Hakura

This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/119.

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Length: 34
Date of creation: 01 May 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/119
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  1. Paolo Angelini & Laurent Clerc & Vasco Cúrdia & Leonardo Gambacorta & Andrea Gerali & Alberto Locarno & Roberto Motto & Werner Roeger & Skander Van den Heuvel & Jan Vlček, 2015. "Basel III: Long-term Impact on Economic Performance and Fluctuations," Manchester School, University of Manchester, vol. 83(2), pages 217-251, 03.
  2. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises: The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  3. Ralph Chami & Thomas F. Cosimano, 2001. "Monetary Policy with a touch of Basel," IMF Working Papers 01/151, International Monetary Fund.
  4. Dalia Hakura & Ralph Chami & Thomas F. Cosimano & Adolfo Barajas, 2010. "U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis," IMF Working Papers 10/131, International Monetary Fund.
  5. Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010. "Securitization without risk transfer," NBER Working Papers 15730, National Bureau of Economic Research, Inc.
  6. von Hagen, Jürgen & Ho, Tai-kuang, 2004. "Money market pressure and the determinants of baning crises," ZEI Working Papers B 20-2004, ZEI - Center for European Integration Studies, University of Bonn.
  7. William Francis & Matthew Osborne, 2009. "Bank regulation, capital and credit supply: Measuring the Impact of Prudential Standards," Occasional Papers 36, Financial Services Authority.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, March.
  9. Mark J. Flannery & Kasturi P. Rangan, 2008. "What Caused the Bank Capital Build-up of the 1990s?," Review of Finance, European Finance Association, vol. 12(2), pages 391-429.
  10. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  11. Patrick Slovik & Boris Cournède, 2011. "Macroeconomic Impact of Basel III," OECD Economics Department Working Papers 844, OECD Publishing.
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