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Basel II and bank lending behavior: Some likely implications for monetary policy in India

  • Nachane, Dilip
  • Ghosh, Saibal
  • Ray, Partha

The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks’ balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

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File URL: http://mpra.ub.uni-muenchen.de/3840/1/MPRA_paper_3840.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3840.

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Date of creation: 18 Mar 2006
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Publication status: Published in Economic and Political Weekly 11.41(2006): pp. 1053-1058
Handle: RePEc:pra:mprapa:3840
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  1. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
  2. Saibal Ghosh & D. M. Nachane & Aditya Narain & Satyananda Sahoo, 2003. "Capital requirements and bank behaviour: an empirical analysis of Indian public sector banks," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(2), pages 145-156.
  3. Kopecky, Kenneth J. & VanHoose, David, 2004. "A model of the monetary sector with and without binding capital requirements," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 633-646, March.
  4. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  5. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  6. International Monetary Fund, 2005. "Monetary Policy and Corporate Behaviour in India," IMF Working Papers 05/25, International Monetary Fund.
  7. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
  8. Jacques, Kevin & Nigro, Peter, 1997. "Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach," Journal of Economics and Business, Elsevier, vol. 49(6), pages 533-547.
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  10. Hall, B.J., 1993. "How Has the Basle Accord Affected Bank Portfolios?," Harvard Institute of Economic Research Working Papers 1642, Harvard - Institute of Economic Research.
  11. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
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  13. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  14. Nachane, D M & Ray, Partha & Ghosh, Saibal, 2005. "The new Basel capital accord: Rationale, design and tentative implications for India," MPRA Paper 17426, University Library of Munich, Germany.
  15. Ralph Chami & Thomas F. Cosimano, 2001. "Monetary Policy with a touch of Basel," IMF Working Papers 01/151, International Monetary Fund.
  16. Raj Aggarwal & Kevin T. Jacques, 1998. "Assessing the impact of prompt corrective action on bank capital and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 23-32.
  17. C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements.
  18. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
  19. Nachane, D M & Ghosh, Saibal, 2004. "Credit rating and bank behavior in India: Possible implications of the new Basel accord," MPRA Paper 17491, University Library of Munich, Germany.
  20. Rime, Bertrand, 2001. "Capital requirements and bank behaviour: Empirical evidence for Switzerland," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 789-805, April.
  21. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-41, February.
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