•The credit creation process has both endogenous and exogenous origins.•Basel III factors display limited effectiveness regarding the credit creation process.•Covid-19 pandemic has a rather small ...positive effect on the credit creation process.
This paper re-examines the exogeneity/endogeneity debate regarding the credit creation process for the Eurozone banking system under the Basel III framework. A two-stage theoretical approach is employed to assess an equity/credit multiplier model and a credit creation model. The results reveal the existence of a mixed outcome (driven by aggregate demand and Basel III factors) regarding the credit creation process for the sample countries and the period under examination. The active but limited effectiveness of the Basel III factors upon the Eurozone banking system is revealed, providing important information for policymakers.
Regulated banks expand relative to shadow banks in recessions and when credit spreads are high, while regulated banks shrink relative to shadow banks in expansions and when credit spreads are low. ...Motivated by these facts, I build a quantitative general equilibrium model with endogenous risk taking to study how competitive interactions between regulated banks and shadow banks affect optimal dynamic capital requirements. Limited liability and deposit insurance can lead regulated banks to provide socially inefficient risky loans when the returns on safer loans decline. Competition for scarcer funding can further lower the net returns on safe loans, making it more attractive for regulated banks to exploit the shield of limited liability with risky loans. Higher capital requirements can reduce inefficient risk at the cost of lower liquidity provision and some migration of credit from regulated banks to shadow banks. Accounting for the interactions of regulated and shadow banks can change the magnitude and direction of the optimal response of capital requirements to shocks that drive the business cycle. Moreover, Basel-III style rules that differentiate between the type of bank loans are much better at mimicking the Ramsey optimal capital requirements than standard rules that aggregate loans. The performance of such dynamic rules can be further improved once they are combined with a small static capital buffer.
The Basel III framework’s liquidity coverage ratio (LCR) requirement aims to make banks more resilient against liquidity shocks. LCR indicates the extent to which a bank is able to meet its payment ...obligations over a 30-day stress period. Notwithstanding the fact that it forms an important addition to information available to regulators, it presents information on the status of a single bank on a monthly reporting basis. In this paper, we generate an LCR-like statistic and simulate liquidity failure for each of the systemically important banks, using historical data from the TARGET2 payment system. Our aim is to uncover paths of contagion. The trigger is a bank with a deteriorating LCR, and we model the knock-on effect as the impact on other banks’ LCR. We then generate the cascade of contagion, which in general consists of multiple paths, to determine the extent to which the financial network further deteriorates. In doing so, we provide paths of contagion that give a sense of the systemic risk present in the network. We find that the majority of damage is caused by a small group of large banks. Furthermore, we found groups of banks that are very vulnerable to shocks, regardless of the size or location of the disruption. Our model reveals that a liquidity shortfall at a stressed bank is a more important driver than the addition of liquidity at other banks. A version of our contagion network based on a 14-day period reveals a monthly pattern, which is in line with other literature in which window dressing is addressed. The data used in this paper are available to supervisors, central banks and resolution authorities, making it possible to anticipate the contagion of liquidity coverage failures within their payment network on a daily basis.
•Funding liquidity positively impacts stock market liquidity.•Domestic retail investors shape the relationship between funding liquidity and market liquidity.•Domestic investors play as implicit ...liquidity providers after the reform.
We examine the relationship between funding liquidity and stock market liquidity. Positive (negative) funding liquidity shocks enhance market liquidity for medium-sized (large and small) firms before Korea adopts the Basel III accord, whereas changes in funding liquidity, in general, precedes changes in market liquidity afterward. The regime-dependent relationship is attributed to the change in domestic individuals’ reaction to funding liquidity shocks. Domestic investors act as liquidity providers for the overall market as funding liquidity improves, while foreigners only trade shares of small firms in response to funding liquidity shocks.
The Net Stable Funding Ratio (NSFR) is a new Basel III liquidity requirement designed to limit funding risk arising from maturity mismatches between bank assets and liabilities. This study explains ...the NSFR and estimates this ratio for banks in 15 countries. Banks below the ratio need to increase stable sources of funding and to reduce assets requiring funding. The most cost-effective strategies to meet the NSFR are to increase holdings of higher-rated securities and to extend the maturity of wholesale funding. These changes reduce net interest margins by 70–88 basis points on average, or around 40% of their year-end 2009 values. Universal banks with diversified funding sources and high trading assets are penalized most by the NSFR.
•This paper examines the possible loan growth effect of the Basel III NSFR and LCR requirements.•The paper examines how the interaction between loan quality and the Basel III liquidity requirements ...might shape bank loan growth rates.•Panel data for 361 commercial banks across 38 African countries are used.•There is evidence that both the NSFR and the LCR exert significant positive effects on bank loan growth rates.•There is evidence that the NSFR reduces the impact of the negative effect of poor performance of loan portfolios on bank loan growth rates.
This paper examines the possible loan growth effect of the Basel III NSFR and LCR requirements in Africa and seeks to determine whether the different regions of the continent are affected differently. The paper also offers what is possibly the first investigation of how the interaction between the performance of loan portfolios and the new Basel III liquidity requirements might shape bank loan growth rates. Using a dataset of 361 commercial banks across 38 African countries over the 2005–2015 period, our static and dynamic panel analyses show that both the NSFR and the LCR exert significant positive effects on bank loan growth rates. The results also reveal that the NSFR reduces the impact of the negative effect of poor performance of loan portfolios on bank loan growth rates. Compliance with the Basel III liquidity rules in Africa is therefore likely to have beneficial impacts on policies intended to increase bank lending in the continent.
•We test z-score, contingent claims, and hazard models for bankruptcy prediction.•Models are evaluated by ROC curve, information content test, and economic value test.•We show that the hazard model ...approach is superior to other approaches.•We find the hazard model of Shumway (2001) is best suited for the UK market.•We set the framework for evaluation of all new failure prediction models.
In recent years hazard models, using both market and accounting information, have become state of the art in predicting firm bankruptcies. However, a comprehensive test comparing their performance against the traditional accounting-based approach or the contingent claims approach is missing in the literature. Using a complete database of UK Main listed firms between 1979 and 2009, our Receiver Operating Characteristics (ROC) curve analysis shows that the hazard models are superior to the alternatives. Further, our information content tests demonstrate that the hazard models subsume all bankruptcy related information in the Taffler (1983)z-score model as well as in Bharath and Shumway (2008) contingent claims-based model. Finally, using a mixed regime competitive loan market with different costs of misclassification, the economic benefit of using the Shumway (2001) hazard model is clear, particularly when the performance is judged with return on risk weighted assets computed under Basel III.
This article illustrates how Basel III, a soft law legal framework guiding how regulators supervise financial institutions in order to prevent and mitigate systemic financial crises, especially the ...requirement regarding the governance of sovereign debt, is being implemented in Indonesia. The analysis was done by scrutinising the relevant authority’s responses and monetary policy during COVID-19. Also, it examines whether the applicable regulations and other related policies align with the grand objectives of the financial sector. This article provides several important takeaways. First, benefiting from the soft traits of Basel III, the oversight authorities (OJK and BI) have tried to enshrine the government’s resilient and prudent financial state through flexibility. Second, instead of taking expansionary legal measures to stimulate the state’s income and limit the state’s expenses, BI and the government have worked together to contain the damage of the pandemic through a quasi-fiscal program (burden-sharing program, BSP). Third, the legislation of Law No. 3/2023 did not make the BI’s objective less risky. It also suggests that more could have been done to prevent the fiscal deficit, especially by the government, through fiscal consolidation (limiting or decreasing the state’s expenses).
We present new evidence on the macroeconomic effects of changes in microprudential bank capital requirements, using confidential regulatory data from the Basel I and II regimes in the United Kingdom. ...Our central result is that an increase in capital requirements lowered lending to firms and households, reduced aggregate expenditure and raised credit spreads. A financial accelerator effect is found to have amplified the macroeconomic responses to shifts in bank credit supply. Results from a counterfactual experiment that links capital requirements to house prices and mortgage spreads indicate that tighter macroprudential policy would have had a moderating effect on house price and mortgage lending growth in the early 2000s, with easier monetary policy acting to offset its contractionary effects on output.
We propose measuring a bank’s distance to compliance with Basel III using a portfolio that makes the bank compliant. This “Distance to Compliance” portfolio describes an implementable strategy and ...incorporates the interactions of all Basel III ratios. We derive the portfolio in a microeconomic banking model in which the board decides on the regulatory target levels and bears the responsibility in case the bank fails to meet the regulatory requirements in a stress situation.
We apply our framework to two hypothetical banks and find that they achieve compliance by growth strategies without cutting lending. We corroborate that shareholders choose different compliance strategies than managers, emphasizing the importance of setting managers’ incentives carefully. We compare our results to findings from impact studies that are not model-based and do not consider the interactions of the Basel III ratios. We observe that the synergies of LCR and NSFR are the most pronounced ones but of secondary order in absolute magnitude. This means that measuring “Distance to Compliance” on a ratio-by-ratio basis omitting synergies, as often done by regulators, does not introduce a major bias.
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