The Risk-Based Capital Credit Crunch Hypothesis, a Dual Perspective

43 Pages Posted: 12 Jun 2012 Last revised: 27 Apr 2013

See all articles by Lara Cathcart

Lara Cathcart

Imperial College Business School

Lina El-Jahel

University of Auckland

Ravel Jabbour

Imperial College Business School

Date Written: April 25, 2013

Abstract

The primary goal sought by the Bank of International Settlements (BIS) and its committee on Banking Supervision (BCBS) is to make banks safer entities and maintain a "level playing field" between them. However, the question of whether this objective can be attained through enforcing capital requirements is still debatable. In fact, there has been a lot of controversy surrounding the impact of regulatory standards, in particular the Basel I and II accords, on crises that occurred soon after the frameworks were introduced to the banking industry. In this research, we explore the hypothesis of whether capital cushions have affected the banks' lending during the 2007-2009 subprime crisis. Using a bank panel dataset obtained from the FDIC covering the period 2004-2009, we observe that capital requirements were indirectly implicated in the crisis while other factors such as leverage, liquidity and securitization played a bigger role by exploiting weaknesses of these requirements. Therefore, these results have direct policy implications with regard to Basel III.

Keywords: Banking, Capital Structure, Financial Crisis

JEL Classification: G2, E5

Suggested Citation

Cathcart, Lara and El-Jahel, Lina and Jabbour, Ravel, The Risk-Based Capital Credit Crunch Hypothesis, a Dual Perspective (April 25, 2013). Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper, Available at SSRN: https://ssrn.com/abstract=2081840 or http://dx.doi.org/10.2139/ssrn.2081840

Lara Cathcart

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+44 (0) 20 7594 9126 (Phone)
+44 (0) 20 7594 9189 (Fax)

Lina El-Jahel

University of Auckland ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Ravel Jabbour (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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