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Bank Behavior in Response to Basel Iii; A Cross-Country Analysis

Thomas Cosimano () and Dalia Hakura

No 11/119, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.

Keywords: Commercial banks; Monetary policy; capital constraints, equity, capital requirements, nonperforming loans, interest expense, bank capital, Central Banking, And The Supply Of Money And Credit, financial Institutions And Services, (search for similar items in EconPapers)
Pages: 34
Date: 2011-05-01
New Economics Papers: this item is included in nep-ban and nep-reg
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