The versatility of money multiplier under Basel III regulations

Wanting Xiong, Boyao Li (), Yougui Wang and H. Eugene Stanley

Finance Research Letters, 2020, vol. 32, issue C

Abstract: The fractional reserve theory of money creation only considers the reserve requirement but ignores prudential regulations. We study the impacts of four prudential regulations under the Basel III framework on the commercial bank’s ability to create money. Using a balance sheet approach, we formulate the corresponding maximum money multiplier under each regulation. We find that in addition to the concerned minimum required ratio, the banking system’s liquidity and default risk portfolios also play key roles in determining the maximum money supply.

Keywords: Prudential regulations; Money creation; Balance sheet approach; Liquidity and equity position; Money multiplier (search for similar items in EconPapers)
JEL-codes: E51 E60 G18 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318309140

DOI: 10.1016/j.frl.2019.04.024

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