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Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords

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  • Roy Zilberman

Abstract

This paper examines the cyclical e¤ects of bank capital requirements in a simple macro model with credit market frictions. A bank capital channel is introduced through a monitoring incentive effect of bank capital buffers on the repayment probability and hence the loan rate. We also identify a collateral channel, which mitigates moral hazard behaviour by firms, and therefore raises their repayment probability. Basel I and Basel II regulatory regimes are then defined, with a distinction made between the Standardized and Foundation Internal Ratings Based (IRB) approaches of Basel II. We analyze the role of the bank capital and collateral channels in the transmission of supply shocks, and show that depending on the strength of these channels, the loan rate can either amplify or mitigate the e¤ects of the shock. Finally, the relative impact of the two channels also determines which of the regulatory regimes is most procyclical.

Suggested Citation

  • Roy Zilberman, 2012. "Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords," Centre for Growth and Business Cycle Research Discussion Paper Series 161, Economics, The University of Manchester.
  • Handle: RePEc:man:cgbcrp:161
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr161.pdf
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    1. Pierre-Richard Agénor & Peter Montiel, 2008. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Open Economies Review, Springer, vol. 19(4), pages 423-455, September.
    2. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2012. "Capital requirements and business cycles with credit market imperfections," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 687-705.
    3. Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
    4. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
    5. Misa Tanaka, 2002. "How Do Bank Capital and Capital Adequacy Regulation Affect the Monetary Transmission Mechanism?," CESifo Working Paper Series 799, CESifo.
    6. Alvaro Aguiar & Ines Drumond, 2007. "Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords," FEP Working Papers 242, Universidade do Porto, Faculdade de Economia do Porto.
    7. Anthony Coleman & Neil Esho & Ian Sharpe, 2006. "Does Bank Monitoring Influence Loan Contract Terms?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(2), pages 177-198, October.
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