The Cost of Bank Regulatory Capital

59 Pages Posted: 20 Jun 2018

See all articles by Matthew C. Plosser

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: June , 2018

Abstract

The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of one year, short-term commitments were not subject to a capital requirement. The Basel II Accord sought to reduce this discontinuity by extending capital standards to most short-term commitments. We use these differences in capital standards around the one-year maturity to infer the cost of bank regulatory capital. Our results show that following Basel I, undrawn fees and all-in-drawn credit spreads on short-term commitments declined (relative to those of long-term commitments). In contrast, following the passage of Basel II, both undrawn fees and spreads went up. These results are robust and confirm that banks act to conserve regulatory capital by modifying the cost and supply of credit.

Keywords: Basel accords, capital regulation, cost of capital, loan spreads

JEL Classification: G21, G28

Suggested Citation

Plosser, Matthew C. and Santos, João A. C., The Cost of Bank Regulatory Capital (June , 2018). FRB of New York Staff Report No. 853, Available at SSRN: https://ssrn.com/abstract=3199903 or http://dx.doi.org/10.2139/ssrn.3199903

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
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João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States
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212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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