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

35 Pages Posted: 9 Jun 2011

See all articles by Thomas F. Cosimano

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Dalia Hakura

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2011

Abstract

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. The data presented in the paper suggest that 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 that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.

Keywords: Commercial banks, capital requirements

JEL Classification: E5 G2

Suggested Citation

Cosimano, Thomas F. and Hakura, Dalia, Bank Behavior in Response to Basel III: A Cross-Country Analysis (May 1, 2011). IMF Working Paper No. 11/119. Available at SSRN: https://ssrn.com/abstract=1860182 or http://dx.doi.org/10.2139/ssrn.1860182

Thomas F. Cosimano (Contact Author)

University of Notre Dame ( email )

513 W. Broad #704
Falls Church, VA 22046
United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dalia Hakura

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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