The Impact of Basel III on European Bank Lending

In reaction to the recent financial crisis, the Basel Committee on Banking Supervision (BCBS) developed the Basel III regulatory framework. The aim of the new regulatory frameworks is to raise the quality and quantity of banks’ regulatory capital base and to improve the risk coverage of the banking sector. The actual value of the Basel III regulations however are an item of discussion. Multiple studies argue that the costs of implementing stricter capital requirements may be significantly higher than the potential gains. In particular, it is expected that an increase in bank capital requirements will have a severe impact on the height of loan rates and the volume of bank lending. The aim of this paper is to determine the impact of the Basel III regulations on banks’ choice of optimal lending rates and associated loan levels. In order to do so, this paper creates a link between the structural model of the capital channel of monetary policy created by Chami and Cosimano (2001) and the stricter capital requirements set under the Basel III regulatory framework.