The impact of capital requirements on bank lending

Jonathan Bridges, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, Marco Spaltro 02 September 2014

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The financial crisis has led to widespread support for greater use of time-varying capital requirements on banks as a macroprudential policy tool (see for example Yellen 2010 and Hanson et al. 2011). Policymakers aim to use these tools to enhance the resilience of the financial system, and, potentially, to curb the credit cycle. Under Basel III, national regulatory authorities will be tasked with setting countercyclical capital buffers over the economic cycle.

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Topics:  Financial markets

Tags:  Macroprudential policy, capital requirements, regulation, bank regulation, BASEL III, Bank of England, financial crisis, bank lending, UK

Credit ratings and regulatory risk weights

Harold Cole, Thomas F Cooley 22 June 2014

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One of the casualties of the financial crisis has been the reputation of the major credit rating agencies. To many, the problem with the credit ratings business seems obvious:

  • The ‘issuer-pays’ market structure, in which the issuers pay the agencies to rate their debt instruments, distorts incentives.

The issuers want higher ratings to lower their cost of borrowing, and can shop among raters to get higher ratings (Pagano and Volpin 2010). Seems obvious, right?

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Topics:  Financial markets Global crisis Microeconomic regulation

Tags:  regulation, credit rating agencies, capital requirements, risk weights, sub-prime crisis, reputation

How to loosen the banks-sovereign nexus

Paolo Angelini, Giuseppe Grande 08 April 2014

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Sovereign debtors and their national banking systems are closely linked through a range of direct and indirect channels. These include banks’ claims on sovereigns, semi-automatic links between sovereign and bank credit ratings, public backstops, collateral in banks’ operations, and the effects of fiscal distress on the overall economy – and thus the quality of bank loans (CGFS 2011, Bank of Italy 2013a).

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Topics:  EU institutions Financial markets

Tags:  bank regulation, capital requirements, home bias, bank capital

Estimating the impact of changes in aggregate bank capital requirements during an upswing

Joseph Noss, Priscilla Toffano 06 April 2014

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The recent financial crisis and economic contraction that followed highlighted the crucial role that banks play in facilitating the extension of credit and enabling economic growth. This underlies the economic rationale for imposing regulations on the banking industry, including minimum capital requirements designed to mitigate risks banks would not otherwise account for in their behaviour.

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Topics:  Financial markets

Tags:  regulations, bank regulation, banking, capital requirements, banks, BASEL III, credit, Macroprudential policy, bank capital

Bank capital requirements: Risk weights you cannot trust and the implications for Basel III

Jens Hagendorff, Francesco Vallascas 16 December 2013

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One of the primary purposes of bank capital is to absorb losses. Where bank capital holdings are insufficient to absorb losses, banks will either fail or – if bank failure is deemed too costly for the economy – be bailed out. In practice, banks frequently receive public funds where capital holdings are insufficient to cover losses in order to prevent bank failure. Whether or not bank capital holdings are sufficient and in line with the risk of bank portfolios is therefore an important question that is hotly debated among policymakers and in the press.

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Topics:  Financial markets Microeconomic regulation

Tags:  Basel II, financial crisis, capital requirements, BASEL III, Basel, bank capital, risk weighting, capital adequacy

Is a 25% bank equity requirement really a no-brainer?

Charles W Calomiris 28 November 2013

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Professor Allan Meltzer famously quipped that “capitalism without failure is like religion without sin”. If some firms are protected from failure when they cannot pay their bills, then competition is skewed to favour inefficient, protected firms. Banks whose debts are guaranteed by the state receive an unfair advantage that enables them to allocate funds inefficiently, recklessly pursue risks at the expense of taxpayers, and waste resources that would be better used by firms operating without such protection.

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Topics:  Financial markets Microeconomic regulation

Tags:  banking, capital requirements, bank capital, bank equity, equity requirements, risk weighting, loan supply

The Future of Banking – solving the current crisis while addressing long-term challenges

Thorsten Beck 25 October 2011

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Three years after the Lehman Brothers failure sent shockwaves through financial markets, banks are yet again in the centre of the storm.

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Topics:  EU institutions EU policies Europe's nations and regions Financial markets Macroeconomic policy Politics and economics Taxation

Tags:  banking, capital requirements, Eurozone crisis, sovereign debt crisis, financial risks, euro bonds, ring-fencing, financial transaction tax, prudential regulation

The Dodd-Frank Act, systemic risk and capital requirements

Viral Acharya, Matthew Richardson 25 October 2011

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The economic theory of regulation is clear. Governments should regulate where there is a market failure. It is a positive outcome from the Dodd-Frank legislation that the Act’s primary focus is on the market failure – namely systemic risk – of the recent financial crisis. The negative externality associated with such risk implies that private markets cannot efficiently solve the problem, thus requiring government intervention.

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Topics:  Financial markets International finance

Tags:  capital requirements, Dodd-Frank Act, macroprudential regulation

Ring-fencing is good, but no panacea

Viral Acharya 25 October 2011

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The recent report issued by the UK's Independent Commission on Banking, chaired by Sir John Vickers, provided recommendations on capital requirements and contained a proposal to ring‑fence banks – in particular, their retail versus investment activities. I view ring-fencing as potentially useful but argue that the more important question is whether the risk weights in current Basel capital requirements are appropriate.

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Topics:  Financial markets International finance

Tags:  bank capital regulation, capital requirements, Vickers Commission, ring-fencing, risk weights

Capital, politics and bank weaknesses

Jon Danielsson 27 June 2011

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Bank capital has emerged as a key element in the post-crisis financial regulatory reforms. Basel III is now likely to include a 7% equity-to-risk-weighted-assets capital requirement.

7% was a compromise. Some countries wanting more capital now intend to implement stricter standards unilaterally. This is making some of the others unhappy, and a bitter debate has erupted within the EU on whether individual EU member countries should be allowed to require more capital than the Basel III, and hence EU, minimums.

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Topics:  Financial markets

Tags:  capital requirements, banks

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