Commercial banks' capital ratio & loan growth : effects of Basel I and Basel II regulation in the U.S.

Lee, Mindee. (2009). Commercial banks' capital ratio & loan growth : effects of Basel I and Basel II regulation in the U.S. Honours Thesis, School of Economics, The University of Queensland.

       
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Author Lee, Mindee.
Thesis Title Commercial banks' capital ratio & loan growth : effects of Basel I and Basel II regulation in the U.S.
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2009
Thesis type Honours Thesis
Total pages 100
Language eng
Subjects 14 Economics
Formatted abstract This research develops a two-way panel data model to analyse structural breaks in the relationship between loan growth and banks' capital ratio across three different capital regulation regimes. The empirical model utilises a cross section of all FDIC-insured commercial banks in the US and a time series over 100 quarters from 1984 to 2009, which covers Pre-Basel I, Basel I and Basel II regulatory regimes. The model specifies a non-linear (inverse) relationship between banks' capital ratio and loan growth, and differentiates the effects of this relationship for banks above and below the minimum required level. The significance of this relationship is a pre-requisite for a capital crunch. For Basel I and II regimes, the model estimates the effects of both leverage ratio and risk-based capital (RBC) ratio on loan growth as they are imposed jointly in the US. The model also analyses the effect of banks' size on loan growth and on the total effect of capital ratio on loan growth. The results suggest that the relationship between loan growth and banks' capital ratio is significant, and present structural breaks for each regulatory regime. We also found that the relationship between capital ratio and loan growth is more prominent under Basel II, making capital crunch more of a concern. Furthermore, the joint implementation of leverage ratio and RBC ratio also has an impact on the role played by leverage ratio on loan growth. Our research represents one of the first contributions to the study on the implementation of both leverage ratio and RBC ratio in capital regulation framework.

 
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