Bank Behavior in Response to Basel Iii: A Cross-Country Analysis
IMF Working Papers, May 1, 2011
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- Bank Behavior in Response to Basel Iii: A Cross-Country Analysis
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Bibliographic details
- Authors: Thomas F. Cosimano, Dalia S Hakura
- Published: May 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455262427.001
Key findings
- Higher capital requirements under the Basel III framework raise banks’ marginal cost of funding and lead to higher lending rates.
- 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 large banks would increase their lending rates by 16 basis points.
- The estimated increase in lending rates would cause loan growth to decline by 1.3 percent in the long run.
- Banks’ responses to the new regulations vary considerably across advanced economies, with a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.
Quantitative results and mechanisms
- Equity-to-asset ratio adjustment required (large banks): 1.3 percentage points.
- Estimated change in lending rates (large banks): 16 basis points.
- Long-run effect on loan growth: decline of 1.3 percent.
- Cross-country variation in outcomes driven by:
- Differences in banks’ net cost of raising equity.
- Differences in the elasticity of loan demand with respect to changes in loan rates.
Methodology
- Empirical strategy: GMM estimations (Generalized Method of Moments) used to quantify the impact of higher capital requirements on lending rates and loan growth.
- Focus: large banks and cross-country comparisons among advanced economies.
Policy-relevant implications
- Basel III capital requirements are expected to tighten bank funding costs and transmit to borrowers through higher lending rates.
- The magnitude of real economy effects (loan growth declines) depends on:
- How costly it is for banks in each country to raise equity.
- How sensitive loan demand is to changes in loan rates.
- Policy responses or mitigants should account for cross-country heterogeneity in these parameters when evaluating the macroeconomic effects of Basel III implementation.
Thematic tags and scope
- Subject areas: 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.
This content unit summarizes findings from "Bank Behavior in Response to Basel Iii: A Cross-Country Analysis."