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A MODEL OF BANK CAPITAL, LENDING AND THE MACROECONOMY: BASEL I VERSUS BASEL II *
Author(s) -
ZICCHINO LEA
Publication year - 2006
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2006.00517.x
Subject(s) - risk adjusted return on capital , capital requirement , capital adequacy ratio , economics , risk weighted asset , basel i , basel ii , basel iii , monetary economics , capital (architecture) , financial capital , economic capital , capital formation , financial system , microeconomics , human capital , market economy , profit (economics) , archaeology , history , incentive
The revised framework for capital regulation of internationally active banks (known as Basel II) introduces risk‐based capital requirements. This paper analyses the relationship between bank capital, lending and macroeconomic activity under the new capital adequacy regime. It extends a model of the bank capital channel of monetary policy—developed by Chami and Cosimano—by introducing capital constraints à la Basel II. The results suggest that bank capital is likely to be less variable under the new capital adequacy regime than under the current one, which is characterized by invariant asset risk‐weights. However, bank lending is likely to be more responsive to macroeconomic shocks.