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

May 1, 2011

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Thomas F. Cosimano, and Dalia S Hakura. Bank Behavior in Response to Basel Iii: A Cross-Country Analysis, (USA: International Monetary Fund, 2011) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Basel III, Demand elasticity, Economic theory, Financial crises, Financial institutions, Financial regulation and supervision, Loans, Stocks

Keywords: Bank capital, Bank equity, Basel III, Capital constraints, Commercial banks, Demand elasticity, Equity-to-asset ratio, Expense ratio, Financial crisis, Global, Largest bank, Loan demand, Loan rate, Loans, Stocks, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/119
Stock No:

WPIEA2011119
ISBN:

9781455262427
ISSN:

1018-5941

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