The Transmission of Bank Capital Requirements and Monetary Policy to Bank Lending

Impact of capital regulation on interest rate pass‐through in Sub‐Saharan Africa

“…Slovik & Cournède (2011) found that an increase in the Basel III capital ratio was associated with higher spreads in the three main OECD economies (the USA, Euro area and Japan). Imbierowicz, Loeffler, and Vogel (2020) found that the conditioning effect of capital on monetary policy transmission was negative i.e . higher capital requirements reduced the size of the pass‐through.…”

“…Some studies (see e.g . Imbierowicz, Loeffler, & Vogel, 2020; Eickmeier & Bundesbank, 2019; Takáts & Temesvary, 2019; Aiyar, Calomiris, & Wieladek, 2014; Bridges et al, 2014) establish that with a binding risk‐based capital ratio (as is the case under the current Basel standards), banks cannot simply expand credit without obtaining additional capital—otherwise, they would breach the minimum regulatory capital requirement and face supervisory sanctions. Given that the regulatory capital requirement is prescribed as a ratio of capital to risk‐weighted assets, weakly capitalised banks may actually seek to improve their solvency by merely cutting back on lending.…”

Liquidity Coverage Ratios and Monetary Policy Credit in the Time of Corona

“…The parameters 𝑑, 𝐾, 𝑎 , 𝐴 , 𝑏 and 𝐵 are all assumed to be positive. 22 As the logarithmic function is not defined for negative values, the parameters 𝐴 and 𝐵 set maximum values for 𝑥 and 𝑦 . Maximizing the net benefit function 𝑁𝐵 with this cost function gives: 𝑦 .…”