Basel Iii Joint Regulatory Constraints: Interactions and Implications for the Financing of the Economy

Abstract

This paper examines the impact of multiple regulatory constraints on the financing of the economy in the context of the implementation of Basel III. We propose a theoretical model of bank lending decision to analyse the interactions between these various regulatory requirements and the conditions under which some constraints may bind while others may not. Building on its predictions, we estimate the impact of these different ratios on lending growth, on a panel of 54 French banks since 2014. Our results indicate that three pairwise interactions, most of them involving the leverage ratio and the LCR, have a weakly significant effect on lending growth. We find that the regulatory ratios interact more for banks with lower regulatory ratios and in periods of financial stress. Our results show that the leverage ratio interacts more with the NSFR, during such periods and for weaker banks, and suggest a partial substitutability relationship.

Keywords: Bank Capital Regulation, Bank Liquidity Regulation, Basel III, stress tests