Banks’ Reactions to Basel-III
Bank of Italy
Bank of Italy
July 26, 2012
Bank of Italy Temi di Discussione (Working Paper) No. 876
We use a dynamic general equilibrium model of the euro area to study banks’ possible responses to the stricter capital requirements called for by the Basel III reform package. We show that the effects on output depend, inter alia, on the strategy banks adopt in response to the reform, and that banks tend to prefer some strategies over others. Specifically, an increase in loan spreads minimizes banks’ costs and induces the sharpest contraction in real activity and investment, in the immediate as well as long term. A recapitalization, or restrictions on dividends, have more modest effects on output, but are less likely to be preferred by banks. We also find that the undesired macroeconomic effects of the reform during the transition phase are significantly mitigated if the reform is announced well ahead of its actual implementation – as was done for the Basel III package.
Number of Pages in PDF File: 37
Keywords: Basel III, capital requirements, macroprudential policy, banks
JEL Classification: E44, E58, E61working papers series
Date posted: July 29, 2012
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