Mapping capital and liquidity requirements to bank lending spreads

Michael King

No 324, BIS Working Papers from Bank for International Settlements

Abstract: This study outlines a methodology for mapping the increases in capital and liquidity requirements proposed under Basel III to bank lending spreads. The higher cost associated with a one percentage point increase in the capital ratio can be recovered by increasing lending spreads by 15 basis points for a representative bank. This calculation assumes the return on equity (ROE) and the cost of debt are unchanged, with no change in other sources of income and no reduction in operating expenses. If ROE and the cost of debt are assumed to decline, the impact on lending spreads is reduced. To recover the additional cost of meeting the December 2009 proposal for the Net Stable Funding Ratio (NSFR), a representative bank would need to increase lending spreads by 24 basis points. Taking into account the fall in risk-weighted assets from holding more government bonds reduces this cost to 12 basis points or less.

Keywords: banks; regulation; Basel III; capital; liquidity; lending spreads (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-11
New Economics Papers: this item is included in nep-ban, nep-bec and nep-reg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (54)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:324

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