Banks Reactions to Basel-III – Paolo Angelini, Bank of Italy. Andrea Geralim, Bank of Italy. July 1, 2012 Bank of Italy Temi di Discussione (Working Paper) No. 876
“We use a dynamic general equilibrium model of the euro area to study banks possible responses to the stricter capital requirements called for by the Basel III reform package. We show that the effects of tighter capital requirements on output depend, inter alia, on the strategy banks adopt in response to the reform, and that banks tend to prefer some strategies over others. Specifically, an increase in loan spreads minimizes banks costs and induces the sharpest contraction in real activity and investment, in the immediate as well as long term. A recapitalization, or restrictions on dividends, have more modest effects on output, but are less likely to be preferred by banks. We also find that the undesired macroeconomic effects of the reform during the transition phase are significantly mitigated if the reform is announced well ahead of its actual implementation as was done for the Basel III package.”
Related postings on financial system
Sorry, comments are closed for this post.