Basel Capital Requirements and Credit Crunch in the MENA Region

IMF Working Papers, July 3, 2013

Source details

Canonical URL: Basel Capital Requirements and Credit Crunch in the MENA Region

Examines the direct link between the implementation of the 1988 Basel I Accord and lending activities.
Data set: annual observations covering 1989–2004 for banks in Egypt, Jordan, Lebanon, Morocco, and Tunisia.

The results provide clear support for a significant increase in credit growth following the implementation of capital regulations, in general.
Despite higher capital adequacy ratios, banks expanded credit and asset growth.
Credit growth appears to be driven by demand fluctuations attributed to:
- real growth,
- cost of borrowing,
- exchange rate risk.
Overall, the effects of macroeconomic variables, in contrast to capital adequacy, appear to be more dominant in determining credit growth, regardless of:
- the capital adequacy ratio,
- variation across banks by nationality, ownership, and listing.

Basel I requirement: banks required to hold capital in proportion to their perceived credit risks; potential link to a “credit crunch” (significant reduction in the supply of credit) is investigated.
Empirical evidence from the MENA sample suggests capital regulation implementation did not contract lending; credit expanded post-implementation.
Macroeconomic conditions (demand-side factors and risk environment) are primary determinants of credit growth in the sample, implying that regulatory capital constraints were not the binding constraint on credit supply in these countries over 1989–2004.

Source: IMF Working Paper "Basel Capital Requirements and Credit Crunch in the MENA Region" by Magda E. Kandil, Working Paper No. 2013/160.