Banks’ Reactions to Basel-III

37 Pages Posted: 29 Jul 2012

Date Written: July 26, 2012

Abstract

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.

Keywords: Basel III, capital requirements, macroprudential policy, banks

JEL Classification: E44, E58, E61

Suggested Citation

Angelini, Paolo and Gerali, Andrea, Banks’ Reactions to Basel-III (July 26, 2012). Bank of Italy Temi di Discussione (Working Paper) No. 876. Available at SSRN: https://ssrn.com/abstract=2118496 or http://dx.doi.org/10.2139/ssrn.2118496

Paolo Angelini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Gerali (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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