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The Effect of the Basel Accord on Bank Lending in Japan

Heather Montgomery

No 2001-22, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: This study investigates the hypothesis that stricter capital adequacy requirements introduced under the 1988 Basel Accord caused Japanese banks to restrict loan growth. Using a panel of Japanese bank balance sheets for fiscal years 1982-1999, this study finds that the 1988 Basel Accord regulation requiring international banks to hold a BIS (Bank for International Settlements) capital to risk-weighted asset ratio of at least 8% increased the sensitivity of total loan growth to capitalization for international banks in Japan. A similar, but quantitatively smaller, finding is reported for a group of "switcher" banks that initially pursued the 8% BIS capital adequacy requirement following the signing of the Basel Accord in 1988, but then later switched to pursue a domestic 4% MOF (Ministry of Finance) capital adequacy requirement. Domestic banks, which were subject to the 4% MOF capital adequacy requirement for the entire post-Basel period, show no evidence of increased sensitivity of lending to capitalization in the post-Basel period.

Keywords: Japanese Banks; Capital Adequacy; Basel Accord; Credit Crunch (search for similar items in EconPapers)
JEL-codes: G21 G28 C23 E51 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2001-09
Note: This paper was presented at the conference on Designing Financial Systems in East Asia and Japan: Toward a Twenty-First Century Paradigm. This two-day conference was co-organized by the International Monetary Fund and the CEI. It was held during September 24-25, 2001 at Hitotsubashi Memorial Hall in Tokyo, Japan. A select group of academics, researchers and policy makers from around the world gathered to examine the timely issue of how the financial systems and corporate governance in East Asia and Japan should be redesigned in order to achieve sustainable economic development. The conference included six sessions with 17 papers. All the presented papers were added to the CEI series of working papers. The series, as well as the contents of the conference, can be reached at http://cei.ier.hit-u.ac.jp.
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http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13951/1/wp2001-22a.pdf

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