Basel Accord and Lending Behavior: Evidence from MENA Region (original) (raw)
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Basel Capital Requirements and Credit Crunch in the MENA Region
IMF Working Papers, 2013
The 1988 Basel I Accord set the common requirements of bank capital to promote the soundness and stability of the international banking system. The agreement required banks to hold capital in proportion to their perceived credit risks, and this requirement may have caused a "credit crunch," a significant reduction in the supply of credit. We investigate the direct link between the implementation of the Basel I Accord and lending activities, using a data set spanning annual observations covering 1989-2004 for banks in Egypt, Jordan, Lebanon, Morocco, and Tunisia. The results provide clear support for a significant increase in credit growth following the implementation of capital regulations, in general. Despite higher capital adequacy ratios, banks expanded credit and asset growth. Credit growth appears to be driven by demand fluctuations attributed to real growth, cost of borrowing, and exchange rate risk. Overall, the effects of macroeconomic variables, in contrast to capital adequacy, appear to be more dominant in determining credit growth, regardless of the capital adequacy ratio, and regardless of variation across banks by nationality, ownership, and listing. JEL classification Numbers: E44; G21; L51 for constructive comments and suggestions. We would also like to thank the editor (Lyn Squire) and two anonymous referees for most helpful suggestions. We thank Kia Penso for her editorial advice.
Has the Basel Capital Requirement Caused Credit Crunch in the Mena Region?
The 1988 Basel I Accord set the common requirements of bank capital to promote the soundness and stability of the international banking system. The agreement required banks to hold capital in proportion to their perceived credit risks, and this requirement may have caused a “credit crunch,” a significant reduction in the supply of credit. We investigate the direct link between the implementation of the Basel I Accord and lending activities, using a data set spanning annual observations covering 1989–2004 for banks in Egypt, Jordan, Lebanon, Morocco, and Tunisia. The results provide clear support for a significant increase in credit growth following the implementation of capital regulations, in general. Despite higher capital adequacy ratios, banks expanded credit and asset growth. Credit gTowth appears to be driven by demand fluctuations attributed to real growth, cost of borrowing, and exchange rate risk. Overall, the effects of macroeconomic variables, in contrast to capital adequ...
Impact of the Basel I Accord on Credit Expansion in Developing Countries
2011
In this paper, we have attempted to conduct a mean-test to determine if the Basel I Accord had any significant effect on bank activities. The mean-test indicates that it had significant impact on bank activities. We find that the Accord was successful in raising the capital ratios and equity of banks, paving the way for the financial soundness of commercial banks. Our findings also show limited evidence supporting the "risk-retrenchment" hypothesis. Given that our samples consist of both developed and developing countries, the study finds some evidence of "credit crunch" in developing countries also. Capital regulations resulted in a decline in bank lending.
Changes in Basel Capital Requirements and Lending Ability of African Commercial Banks
Journal of Central Banking Theory and Practice
This research examines the potential impact of Basel IV capital requirements (CAR) on bank lending ability in Africa. To achieve the objective, the study simulated Basel IV capital ratio using historical data to create sample representative banks as if the selected banks had implemented Basel IV CAR for the period 2000 and 2018 and used actual data for existing Basel II and III CAR. Dynamic panel regression analyses, namely the System GMM and P-ARDL, were utilised. First, our results suggest that higher Basel CAR, particularly the new Basel IV, portends short-term negative impacts on bank lending while the long-term impact on bank lending is favorable. Second, the weight of non-performing loans tends to decline as banks transitioned from lower to higher Basel CAR. Lastly, this study shows that complying with Basel IV CAR will help African banks to achieve financial deepening and increase bank lending ability.
Basel II and Bank Credit Risk: Evidence from the Emerging Markets
SSRN Electronic Journal, 2000
Existing literature has focused attention on the impact of Basel I and similar capital requirement regulations on developed countries where such regulations were found to be effective in increasing capital ratios and reducing portfolio credit risk of commercial banks. In the present study, we study the impact of such capital requirement regulations on commercial banks in 11 developing countries around the world within a cross-section framework with the widely popular simultaneous equations model of . Surprisingly, we find that such regulations did not increase the capital ratios of banks in the developing countries. This implies that particular attention should be given to the business, environmental, legal, cultural realities of such countries while designing and implementing such policies for developing countries. However, we find evidence that such regulations did reduce portfolio risk of banks. We also find that capital ratios and portfolio risk are inversely related in contrast to the predictions of "buffer capital theory", "managerial risk aversion theory", and "bankruptcy cost avoidance theory." Our, evidence also shows that level of financial development and credit risk are inversely related implying that as the financial sector of a country develops it opens up avenues for alternative sources of finance, which results in reduced risk. Further evidence shows that liberalization is associated with bank risk.
Basel III and its Effects on Banking Performance: Investigating Lending Rates and Loan Quantity
Journal of Finance and Bank Management, 2014
In late 2010, the Basel Committee on Banking Supervision issued the Basel III document enumerating measures focused on improvements in the definition of regulatory capital, introduction of a leverage ratio as a backstop for risk-based capital requirement, capital buffers, enhancement of risk coverage through improvements in the methodology to measure counterparty credit risk and liquidity measurement standards. This study investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks' marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that assuming a 1.3 percentage point increase in the equity-to-asset ratio to meet the Basel III regulations, the country-by-country estimations imply a reduction in the volume of loans by an average 4.97 percent in the long run for the banks in countries that experienced a crisis and by 18.67 percent for the banks in countries that did not experience a crisis. The wide variance in the results reflects crosscountry differences in the elasticity of loan demand with respect to loan interest rateand bank's net cost of raising equity.
Bank Behavior in Response to Basel Iii: A Cross-Country Analysis
IMF Working Papers, 2011
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks' marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks' responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks' net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates. JEL Classification Numbers: E5, G2
2019
This paper aims to investigate the influence of bank capitalization and institutional quality on the lending activity of commercial banks in the MENA region over the period from 2000 to 2016. By applying the fixed effect panel data estimator, we find that, commercial bank lending depends on bank-specific variables, macroeconomic variables and the institutional environment. Our results show that any increase in bank capitalization and the implementation of capital regulation (Basel II and Basel III) have negative impacts on the credit supply. We find, also, that political stability and good regulatory quality encourage foreign, domestic and private banks to improve their credit supply. However, commercial banks tend to behave cautiously when there is increasing government effectiveness and financial freedom.
2018
The research is financed by the Nation Natural Science Foundation of China under number 71173060. Abstract The global financial crisis in 2008 shows that the successive agreements Basel I, and II failed to stop the global financial collapse. Therefore, this research tries to answer the study question that; can Basel III enhancement give the banking sectors stability? Our data includes 324 listed from the largest banks across Middle East. Results from PLS-SEM analyses demonstrate bank risk is positive relationship related to charter value, information systems and Internal/External control systems. We find negative relationship among bank risk and market discipline. Following our finding, the result shows there is no relationship between bank risk and bank capital and the results suggest that Charter Value is the most important predictor of bank risk. Keywords: Basel III, Bank Risk, Bank capital, charter value, information system, control system, market discipline, Middle East.
Could Basel Regulatory Framework Have Saved Lebanese Banks?
Indonesian Management and Accounting Research
This paper aims to enhance in-depth analysis of the impact of various risks: credit risk, interest rate risk, market risk and liquidity risk as well as the volume of activity on the capital adequacy ratio of the Lebanese banks. It is confined to 31 banks out of the 63 banks operating in Lebanon, non-probability sample, during the period 2012-2018 using the regression analysis. The findings indicate that all the independent variables have a negative impact on banks’ solvency; while the liquidity risk has a positive effect, the market risk and the volume of activity variables have no significant relationship with the solvency of banks. Meanwhile, credit risk has proven its largest and most important role in the ability to reduce or increase the Lebanese banks’ solvency. But banks still have to respect a liquidity ratio, which is confirmed by the Basel III agreements. The originality of this study comes from the particularity of Lebanese banks for its core role in the Lebanese economy....