Capital and liquidity requirements: impact on bank lending spreads
by Vighneswara Swamy
International Journal of Banking, Accounting and Finance (IJBAAF), Vol. 6, No. 1, 2015

Abstract: This study provides an estimation of bank lending spreads in the context of new capital and liquidity requirements proposed under Basel III by constructing a stylised representative bank's financial statement. We show that the higher cost associated with an increase in the capital ratio may be recovered by increasing lending spreads. The results indicate that in the case of scheduled commercial banks, one-percentage point increase in capital ratio can be recovered by increasing the bank lending spread by 31 basis points which could go up to 100 basis points for six percentage point increase assuming that the risk-weighted assets are unchanged. We also provide the estimations for the scenarios of changes in risk-weighted assets, changes in return on equity (ROE) and the cost of debt.

Online publication date: Wed, 08-Jul-2015

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