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Loan pricing under Basel II in an imperfectly competitive banking market

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  • Ruthenberg, David
  • Landskroner, Yoram

Abstract

The new Basel II Accord (2006), established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. We relate to the two approaches for capital requirements (internal and standardized) and distinguish between retail and corporate customers. Our loan-equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank. The main results indicate that high quality corporate and retail customers will enjoy a reduction in loan interest rates in (big) banks which, most probably, will adopt the IRB approach. On the other hand high risk customers will benefit by shifting to (small) banks that adopt the standardized approach.

Suggested Citation

  • Ruthenberg, David & Landskroner, Yoram, 2008. "Loan pricing under Basel II in an imperfectly competitive banking market," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2725-2733, December.
    • Handle: RePEc:eee:jbfina:v:32:y:2008:i:12:p:2725-2733
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    References listed on IDEAS

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    1. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios Tsomocos, 2005. "Procyclicality and the new Basel Accord - banks’ choice of loan rating system," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 537-557, October.
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    5. Liebig, Thilo & Porath, Daniel & di Mauro, Beatrice Weder & Wedow, Michael, 2004. "How will Basel II affect bank lending to emerging markets? An analysis based on German bank level data," Discussion Paper Series 2: Banking and Financial Studies 2004,05, Deutsche Bundesbank.
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    7. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
    8. Sealey, C W, Jr, 1980. "Deposit Rate-Setting, Risk Aversion, and the Theory of Depository Financial Intermediaries," Journal of Finance, American Finance Association, vol. 35(5), pages 1139-1154, December.
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