The impact of Basel I capital regulation on bank deposits and loans: Empirical evidence for Europe

Birgit Schmitz
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Birgit Schmitz: IIW Institute for International Economics University of Bonn

No 42, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: The Basel Committee on Banking and Supervision established minimum capital requirements for banks in their 1988 Capital Accord. This capital regulation was adopted for European Union banks at the beginning of 1993. After the implementation, a widespread concern emerged about the possible negative impact that higher capital requirements could exert on the level of economic activity, especially on bank lending. This paper investigates the impact of the Basel Accord on bank deposits and loans for eight European countries. We follow the approach taken by Peek and Rosengren (1995a) and test for the regulatory effect in a panel structure with about 2500 individual bank balance sheets for the years 1993-1995. We find that changes in deposits are positively correlated with changes in capital. Lower-capitalized banks show a stronger response to a change in capital than their higher-capitalized competitors. This evidence is consistent with the hypothesis that the implementation of minimum capital requirements had a negative effect on the supply of bank loans

Keywords: Bank capital regulation; Basel Accord of 1988; EU Banking (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2007-02-02
New Economics Papers: this item is included in nep-acc, nep-ban and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mmf:mmfc06:42

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