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The versatility of money multiplier under Basel III regulations

Author

Listed:
  • Xiong, Wanting
  • Li, Boyao
  • Wang, Yougui
  • Stanley, H. Eugene

Abstract

The fractional reserve theory of money creation only considers the reserve requirement but ignores prudential regulations. We study the impacts of four prudential regulations under the Basel III framework on the commercial bank’s ability to create money. Using a balance sheet approach, we formulate the corresponding maximum money multiplier under each regulation. We find that in addition to the concerned minimum required ratio, the banking system’s liquidity and default risk portfolios also play key roles in determining the maximum money supply.

Suggested Citation

  • Xiong, Wanting & Li, Boyao & Wang, Yougui & Stanley, H. Eugene, 2020. "The versatility of money multiplier under Basel III regulations," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318309140
    DOI: 10.1016/j.frl.2019.04.024
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    References listed on IDEAS

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    1. Li, Boyao & Xiong, Wanting & Chen, Liujun & Wang, Yougui, 2017. "The impact of the liquidity coverage ratio on money creation: A stock-flow based dynamic approach," Economic Modelling, Elsevier, vol. 67(C), pages 193-202.
    2. Keen, Steve, 2010. "Solving the paradox of monetary profits," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 4, pages 1-32.
    3. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
    4. Werner, Richard A., 2014. "Can banks individually create money out of nothing? — The theories and the empirical evidence," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 1-19.
    5. Carpenter, Seth & Demiralp, Selva, 2012. "Money, reserves, and the transmission of monetary policy: Does the money multiplier exist?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 59-75.
    6. István Ábel & Kristóf Lehmann & Attila Tapaszti, 2016. "The controversial treatment of money and banks in macroeconomics," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 15(2), pages 33-58.
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    Citations

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    Cited by:

    1. Yu, Miao & Feng, Zijian & Wang, Yougui, 2022. "The business cycles driven by loan defaults via credit creation: An agent-based perspective," Finance Research Letters, Elsevier, vol. 48(C).
    2. Economou, Fotini & Panagopoulos, Yannis, 2023. "Assessing the credit creation process under the Basel III framework: Some evidence from the Eurozone," Finance Research Letters, Elsevier, vol. 51(C).
    3. Li, Boyao & Wang, Yougui, 2020. "Money creation within the macroeconomy: An integrated model of banking," International Review of Financial Analysis, Elsevier, vol. 71(C).
    4. Cuong, Ly Kim & Pham, Ha, 2021. "Direct and indirect impacts of European banks’ regulation," Finance Research Letters, Elsevier, vol. 40(C).
    5. Li, Boyao, 2024. "A balance sheet analysis of monetary policy effects on banks," MPRA Paper 120882, University Library of Munich, Germany.
    6. Li, Boyao, 2022. "How does bank equity affect credit creation? Multiplier effects under Basel III regulations," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 299-324.
    7. Li, Boyao, 2024. "A balance sheet analysis of monetary policy effects on banks," Global Finance Journal, Elsevier, vol. 61(C).
    8. Li, Boyao, 2022. "The macroeconomic effects of Basel III regulations with endogenous credit and money creation," MPRA Paper 113873, University Library of Munich, Germany.
    9. Li, Boyao, 2021. "Bank equity, interest payments, and credit creation under Basel III regulations," MPRA Paper 111269, University Library of Munich, Germany.
    10. Li, Boyao, 2021. "When government expenditure meets bank regulation: The impact of government expenditure on credit supply," MPRA Paper 111311, University Library of Munich, Germany.
    11. Xiong, Wanting & Wang, Yougui, 2022. "A reformulation of the bank lending channel under multiple prudential regulations," Economic Modelling, Elsevier, vol. 114(C).
    12. Xing, Xiaoyun & Gu, Xuesong & Guo, Kun & Deng, Jing, 2024. "The interactive impact of green supporting factors on bank credit creation: An agent-based stock-flow consistent approach," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).

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    More about this item

    Keywords

    Prudential regulations; Money creation; Balance sheet approach; Liquidity and equity position; Money multiplier;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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