The cost of bank regulatory capital

Matthew Plosser and Joao Santos

No 853, Staff Reports from Federal Reserve Bank of New York

Abstract: The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of one year, short-term commitments were not subject to a capital requirement. The Basel II Accord sought to reduce this discontinuity by extending capital standards to most short-term commitments. We use these differences in capital standards around the one-year maturity to infer the cost of bank regulatory capital. Our results show that following Basel I, undrawn fees and all-in-drawn credit spreads on short-term commitments declined (relative to those of long-term commitments). In contrast, following the passage of Basel II, both undrawn fees and spreads went up. These results are robust and confirm that banks act to conserve regulatory capital by modifying the cost and supply of credit.

Keywords: Basel accords; capital regulations; cost of capital; loan spreads (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2018-06-01
New Economics Papers: this item is included in nep-ban and nep-cba
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Citations: View citations in EconPapers (4)

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Journal Article: The Cost of Bank Regulatory Capital (2024)
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