The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks

Sebastián Nieto ()

Revista de Economía del Rosario, 2005, No 3609

Abstract: In order to analyze the impact of the new banking capital regulation (Basel II) on the business cycle in an emerging economy, I develop a duopoly model composed of domestic and foreign banks. The principal results are: by the conduct of new banking capital regulation, the assessment of credit risk carried out by an international bank in a given country not only affects the total loans in that country but also the total assets supplied in other countries. Second, analyzing risk-averse banks, as portfolio diversification increases, the change in loans allocated in a given country by an international bank as a proportion of the original investment and the total level of loans for that country can be harshly affected by the behavior of a foreign bank following only news" through the new capital regulation. Finally, even in the case that portfolio diversification increases without limits, the macroeconomic implication of a change of credit risk estimation, via the new capital regulation, is larger when banks are risk-neutral than risk-averse."

Keywords: Market imperfection; Credit; Portfolio choice; Banking regulation (search for similar items in EconPapers)
JEL-codes: D43 E51 G11 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000151:003609

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