TAILIEUCHUNG - Bank Behavior in Response to Basel III: A Cross-Country Analysis

Even as new species are evolving, however, others may become extinct. The rate at which species become extinct may be low in one lineage and high in another. It’s also possible for the rate of extinction to rise, only to drop again later. All of these processes can also unfold at the same time, and so the range of possible long-term patterns in evolution can be enormous. A lineage with a low rate of speciation may end up enormously diverse because its rate of extinction is even lower. On the other hand, a lineage that produces new species at a rapid rate may still have relatively few. | WP 11 119 Bank Behavior in Response to Basel III A Cross-Country Analysis Thomas F. Cosimano and Dalia S. Hakura INTERNATIONAL MONETARY FUND 2011 International Monetary Fund WP 11 119 IMF Working Paper IMF Institute Bank Behavior in Response to Basel III A Cross-Country Analysis Prepared by Thomas F. Cosimano and Dalia S. Hakura1 Authorized for distribution by Eric Clifton May 2011 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements by raising banks marginal cost of funding lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points causing loan growth to decline by percent in the long run. The results also suggest that banks responses to the new regulations will vary considerably from one advanced economy to another . a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the . depending on cross-country variations in banks net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates. JEL Classification Numbers E5 G2 Keywords Commercial banks capital constraints Authors E-Mail Addresses and dhakura@ 1 Cosimano is affiliated with the University of Notre Dame and Hakura is with the International Monetary Fund. The authors thank Leslie Lipschitz and

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