A model of bank capital, lending and the macroeconomy: Basel I versus Basel II

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 August 2005

Working Paper No. 270
By Lea Zicchino

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 characterised by invariant asset risk-weights. However, bank lending is likely to be more responsive to macroeconomic shocks.

PDFA model of bank capital, lending and the macroeconomy: Basel I versus Basel II

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