{
  "title": "Bank Behavior in Response to Basel Iii: A Cross-Country Analysis",
  "publication": "IMF Working Papers, May 1, 2011",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870",
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  "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.",
  "sections": [
    {
      "heading": "Key findings",
      "content": "- Higher capital requirements under the Basel III framework raise banks’ marginal cost of funding and lead to higher lending rates.\n- Large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework.\n- GMM estimations indicate large banks would increase their lending rates by 16 basis points.\n- The estimated increase in lending rates would cause loan growth to decline by 1.3 percent in the long run.\n- 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."
    },
    {
      "heading": "Quantitative results and mechanisms",
      "content": "- Equity-to-asset ratio adjustment required (large banks): 1.3 percentage points.\n- Estimated change in lending rates (large banks): 16 basis points.\n- Long-run effect on loan growth: decline of 1.3 percent.\n- Cross-country variation in outcomes driven by:\n  - Differences in banks’ net cost of raising equity.\n  - Differences in the elasticity of loan demand with respect to changes in loan rates."
    },
    {
      "heading": "Methodology",
      "content": "- Empirical strategy: GMM estimations (Generalized Method of Moments) used to quantify the impact of higher capital requirements on lending rates and loan growth.\n- Focus: large banks and cross-country comparisons among advanced economies."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Basel III capital requirements are expected to tighten bank funding costs and transmit to borrowers through higher lending rates.\n- The magnitude of real economy effects (loan growth declines) depends on:\n  - How costly it is for banks in each country to raise equity.\n  - How sensitive loan demand is to changes in loan rates.\n- Policy responses or mitigants should account for cross-country heterogeneity in these parameters when evaluating the macroeconomic effects of Basel III implementation."
    },
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      "heading": "Thematic tags and scope",
      "content": "- Subject areas: Banking; Basel III; Demand elasticity; Economic theory; Financial crises; Financial institutions; Financial regulation and supervision; Loans; Stocks.\n- 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.\n\nThis content unit summarizes findings from \"Bank Behavior in Response to Basel Iii: A Cross-Country Analysis.\"\n\n---\n\n Content in this bundle\n\n- Wp11119\n  - Wp11119 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Wp11119 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870"
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    "Authors: Thomas F. Cosimano, Dalia S Hakura",
    "Published: May 1, 2011",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455262427.001",
    "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.",
    "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:",
    "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.",
    "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:",
    "Policy responses or mitigants should account for cross-country heterogeneity in these parameters when evaluating the macroeconomic effects of Basel III implementation.",
    "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.",
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