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Bank equity, interest payments, and credit creation under Basel III regulations

Boyao Li ()

MPRA Paper from University Library of Munich, Germany

Abstract: Both equity and regulation play key roles in determining the ability of credit creation of banks. The equity endogenously varies while the regulations are exogenously imposed. I propose a banking model to investigate how the changes in bank equity due to interest receipt and expenditure affect credit and money creation under the Basel III regulations. Three Basel III regulations are discussed: the capital adequacy ratio, liquidity coverage ratio, and net stable funding ratio. The effects on credit creation are demonstrated by the changes in the credit supply in response to the interest payments changing the equity. My results indicate that the changes in equity cause multiplier effects on the credit supply. The multipliers depend on the regulatory constraints. Similarly, I present the impacts on money creation, given by the multiplier effects on the money supply. This study sheds considerable light on how bank equity and Basel III regulations affect credit and money creation.

Keywords: Credit creation; Basel III; Bank equity; Interest payments; Multiplier effect; Balance sheet (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 G32 (search for similar items in EconPapers)
Date: 2021-12-28
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-mac and nep-rmg
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https://mpra.ub.uni-muenchen.de/111269/2/MPRA_paper_111269.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/114498/1/MPRA_paper_114498.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/116890/1/MPRA_paper_116890.pdf revised version (application/pdf)

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