Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords
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.
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- Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
- Inês Drumond, 2008.
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FEP Working Papers
277, Universidade do Porto, Faculdade de Economia do Porto.
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- Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2012.
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- Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2009. "Capital requirements and business cycles with credit market imperfections," Policy Research Working Paper Series 5151, The World Bank.
- Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2009. "Capital Requirements and Business Cycles with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 124, Economics, The Univeristy of Manchester.
- Pierre-Richard & K. Alper & L. Pereira da Silva, 2011. "Capital Requirements and Business Cycles with Credit Market Imperfections," Working Papers Series 231, Central Bank of Brazil, Research Department.
- 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.
- Anthony Coleman & Neil Esho & Ian Sharpe, 2006. "Does Bank Monitoring Influence Loan Contract Terms?," Journal of Financial Services Research, Springer, vol. 30(2), pages 177-198, October.
- Misa Tanaka, 2002. "How Do Bank Capital and Capital Adequacy Regulation Affect the Monetary Transmission Mechanism?," CESifo Working Paper Series 799, CESifo Group Munich.
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