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

_IMF Working Papers, May 1, 2011_

## Source details

**Canonical URL:** [Bank Behavior in Response to Basel Iii: A Cross-Country Analysis](https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870/bundle-manifest.json)

## 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."*

---

## Content in this bundle

- **Wp11119**
  - [Wp11119 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11119.pdf.md){rel="alternate" type="text/markdown"}
  - [Wp11119 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11119.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-behavior-in-response-to-basel-iii-a-cross-country-analysis-24870_