Publication detail

The Impact of Basel III on Lending Rates of EU Banks

Author(s): prof. PhDr. Petr Teplý Ph.D., Mgr. Barbora Šútorová (IES)
Type: Articles in journals with impact factor
Year: 2013
Number: 3
ISSN / ISBN: 0015-1920
Published in: Czech Journal of Economics and Finance, Czech Republic
Publishing place: Prague, Czech Republic
Keywords: Basel III, bank, capital requirements, EU, lending rates, regulation
JEL codes: G18, G21, G32
Suggested Citation: Šútorová, B., Teplý, P. (2013), “The Impact of Basel III on Lending Rates of EU Banks.“ Czech Journal of Economics and Finance, Vol. 63, No. 3, pp. 226-243
Grants: CERGE-EI Foundation (2013) The impact of foreign bank ownership on banks´ financial performance in the CEE and New Zealand GACR 403/10/1235 (2010-2014) Institutional Responses to Financial Market Failures
Abstract: In this paper we focus on practical aspects of the new framework for banking regulation
in the European Union as defined in Basel III and Capital Requirements Directive IV. We employ a simultaneous equations model where banks choose the optimal level of capital, which is seen as a call option. In our modeling, we employ data on 594 banks in the European Union during the 2006–2011 period. Our results predict a modest drop in the level of loans provided of about 2% from the current level. The drop in loans is not expected to be large because (i) many European banks are already complying with the capital requirements even though they are not yet fully compulsory, (ii) the impact of
a one percentage point increase in the common equity ratio should lead to an increase in lending rates of only 18.8 basis points, and (iii) the elasticity of demand for loans in the EU is reported to be relatively low. Taking into consideration the seven-year implementation period for the new capital requirements, the impacts should not be very perceptible for the EU economies.
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