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

Are banks too large?

Lev Ratnovski, Luc Laeven, Hui Tong 31 May 2014

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Large banks have grown significantly in size and become more involved in market-based activities since the late 1990s. Figure 1 shows how the balance-sheet size of the world’s largest banks increased two- to four-fold in the ten years prior to the crisis. Figure 2 illustrates how banks shifted from traditional lending towards market-oriented activities.

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Topics:  Financial markets

Tags:  regulation, economies of scale, bank regulation, banking, Too big to fail, systemic risk, BASEL III, bank resolution, 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

The new market-risk regulations

Jon Danielsson 28 November 2013

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The final shape of the Basel III proposals is increasingly becoming clear, (see Basel Committee 2012, 2013). While the proposals are generally quite technical, the fundamental elements of the market-risk proposals are simple and easily evaluated, providing means to evaluate the quality of the overall proposal.

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Topics:  Financial markets

Tags:  BASEL III, market risk

The impact of liquidity regulation on monetary-policy implementation

Clemens Bonner, Sylvester Eijffinger 14 October 2013

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In response to the recent financial crisis, the Basel Committee on Banking Supervision has drafted a new regulatory framework (henceforth Basel III) with the aim to achieve a more robust banking system. While it also tightens the existing requirements for capital, the proposal stands out as it is the first to attempt harmonised liquidity regulation across the globe. Specifically, the framework includes the short-term Liquidity Coverage Ratio (Liquidity Coverage Ratio) and the long-term Net Stable Funding Ratio.

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Topics:  Financial markets Monetary policy

Tags:  monetary policy, liquidity, financial regulation, BASEL III, liquidity coverage ratio

How much capital should banks have?

Lev Ratnovski 28 July 2013

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There is an active debate on how much capital banks should have. Yet establishing an 'optimal' level of bank capital is more art than science. Any conclusion is model-specific and contains a degree of judgement. The purpose of this column is to contribute to the debate by offering one more benchmark.

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Topics:  Financial markets

Tags:  banks, BASEL III, capital ratios

Capital adequacy and hidden risk

Mike Mariathasan, Ouarda Merrouche 29 June 2013

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The regulation of bank capital has recently come under renewed scrutiny. While some commentators argue for higher requirements (e.g. Admati and Hellwig 2012), others – and the banking industry in particular – are quoting the risk of reduced credit and the corresponding costs for the economy. At the same time, there have also been frequent reports suggesting that banks were hiding risks during the Crisis, in order to escape governmental intervention and to maintain market access (Hume 2012, Comfort 2012).

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Topics:  International finance

Tags:  BASEL III, capital regulation, RWA, risk weighted assets, IRB, internal ratings based approach

A viable alternative to Basel III prudential rules

Stefano Micossi 09 June 2013

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There is something surreal in the process for the implementation of the new Basel capital framework for banks in the EU and US. The new rules, known as Basel III, have the full support of financial officialdom (see BCBS 2013b for the latest official update by Basel Supervisors). Implementation is a different story. Implementation appears fraught with frictions and resistances, while the system is by now utterly discredited in the eyes of financial markets and academia (e.g. Dewatripont et al. 2010, Goodhart 2013, Admati and Hellwig 2013).

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Topics:  International finance

Tags:  BASEL III

Basel III: Europe’s interest is to comply

Nicolas Véron 05 March 2013

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On 14 February, European Commissioner Michel Barnier and Federal Reserve Governor Daniel Tarullo both indicated their agreement to quickly give the Basel III accord binding force over European and US banks respectively (Jones 2013). This is welcome. But even more important than the speed of adoption is that implementation should stay true to what the accord stipulates. At this point, and contrary to many perceptions in Europe, this goal is more likely to be reached by the US than by the EU.

Basel III’s bite

Basel III changes financial regulation:

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Topics:  EU policies International finance

Tags:  EU, financial regulation, BASEL III

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