The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks

Revista de Economía del Rosario, Vol. 8, No. 1, 2005

25 Pages Posted: 7 Sep 2006

See all articles by Sebastián Nieto Parra

Sebastián Nieto Parra

Organization for Economic Co-Operation and Development (OECD)

Abstract

In order to analyze the impact of the new banking capital regulation (Basel II) on the business cycle in an emerging economy, I develop a duopoly model composed of domestic and foreign banks. The principal results are: by the conduct of new banking capital regulation, the assessment of credit risk carried out by an international bank in a given country not only affects the total loans in that country but also the total assets supplied in other countries. Second, analyzing risk-averse banks, as portfolio diversification increases, the change in loans allocated in a given country by an international bank as a proportion of the original investment and the total level of loans for that country can be harshly affected by the behavior of a foreign bank following only "news" through the new capital regulation. Finally, even in the case that portfolio diversification increases without limits, the macroeconomic implication of a change of credit risk estimation, via the new capital regulation, is larger when banks are risk-neutral than risk-averse.

Keywords: Market imperfection, Credit, Portfolio choice, Banking regulation

JEL Classification: D43,E51,G11

Suggested Citation

Nieto Parra, Sebastián, The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks. Revista de Economía del Rosario, Vol. 8, No. 1, 2005, Available at SSRN: https://ssrn.com/abstract=928533

Sebastián Nieto Parra (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris, 75775
France

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