Mapping Capital and Liquidity Requirements to Bank Lending Spreads

35 Pages Posted: 29 Nov 2010

Date Written: November 1, 2010

Abstract

This study outlines a methodology for mapping the increases in capital and liquidity requirements proposed under Basel III to bank lending spreads. The higher cost associated with a one percentage point increase in the capital ratio can be recovered by increasing lending spreads by 15 basis points for a representative bank. This calculation assumes the return on equity (ROE) and the cost of debt are unchanged, with no change in other sources of income and no reduction in operating expenses. If ROE and the cost of debt are assumed to decline, the impact on lending spreads is reduced. To recover the additional cost of meeting the December 2009 proposal for the Net Stable Funding Ratio (NSFR), a representative bank would need to increase lending spreads by 24 basis points. Taking into account the fall in risk-weighted assets from holding more government bonds reduces this cost to 12 basis points or less.

Keywords: Banks, Regulation, Basel III, Capital, Liquidity, Lending Spreads

JEL Classification: G21, G28, E51

Suggested Citation

King, Michael Robert, Mapping Capital and Liquidity Requirements to Bank Lending Spreads (November 1, 2010). BIS Working Paper No. 324, Available at SSRN: https://ssrn.com/abstract=1716884 or http://dx.doi.org/10.2139/ssrn.1716884

Michael Robert King (Contact Author)

Gustavson School Of Business ( email )

University of Victoria
Business & Economics Building, Room 246
Victoria, British Columbia V8W 2Y2
Canada
250-721-6425 (Phone)

HOME PAGE: http://https://www.uvic.ca/gustavson/faculty/faculty/faculty/current/kingm.php

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