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Capital shocks, bank asset allocation, and the revised Basel Accord

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  • Jacques, Kevin T.

Abstract

In contrast to the 1988 Basel Accord (Basel I), the revised risk-based capital standards (Basel II) propose regulatory capital requirements based on credit ratings. This paper develops a theoretical model to analyze how banks will adjust their low and high credit risk commercial loans under the proposed newer standard. Capital-constrained banks respond to an adverse capital shock by reducing high credit risk loans, while under certain circumstances, low credit risk loans may actually increase. When compared to Basel I, it is shown that high-risk loans are reduced more under Basel II, but whether a bank reduces total lending more under Basel I or under the revised standards depends on a complex interaction of factors.

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  • Jacques, Kevin T., 2008. "Capital shocks, bank asset allocation, and the revised Basel Accord," Review of Financial Economics, Elsevier, vol. 17(2), pages 79-91.
    • Handle: RePEc:eee:revfin:v:17:y:2008:i:2:p:79-91
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    6. Giulioni, Gianfranco, 2015. "Policy interest rate, loan portfolio management and bank liquidity," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 52-74.
    7. Said, Fathin Faizah, 2014. "Two-Period Model of Bank Lending Channel: Basel II Regulatory Constraints," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 48(1), pages 87-97.
    8. Maurin, Laurent & Toivanen, Mervi, 2012. "Risk, capital buffer and bank lending: a granular approach to the adjustment of euro area banks," Working Paper Series 1499, European Central Bank.
    9. Said, Fathin Faizah, 2013. "The dynamic of bank lending channel: Basel regulatory constraint," Economic Modelling, Elsevier, vol. 31(C), pages 606-613.

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