Basel II and Banking Behavior in Local Markets

23 Pages Posted: 21 Jan 2009

See all articles by Mariatiziana Falcone

Mariatiziana Falcone

affiliation not provided to SSRN

Francesco Trivieri

Università degli Studi della Calabria - Department of Economics and Statistics

Damiano Bruno Silipo

University of Calabria

Date Written: January 20, 2009

Abstract

The paper deals with the effects of the new capital requirements (Basel II) on banking behaviour. Since the core of the new rules is the greater sensitivity of regulatory capital to the borrowers' risks, we investigated whether banks react to the new rules by differentiating their lending behaviour accordingly. Our theoretical conclusions indicate that as banks switch from Basel I to Basel II rules, they reallocate loans from high-risk to low-risk borrowers, while making interest rates more sensitive to probability of default. An econometric study using Italian data supports both these conclusions. Specifically, we find that as banks adapt to Basel II interest rates on loans do become more sensitive to default risk. In addition, an increase in the interest rate reduces the availability of credit in Southern regions, but increases it in the Centre-North. These results suggest that under Basel II higher-risk firms are likely to pay more for loans, and that firms located in the South are likely to be more severely affected.

Keywords: Risk-based capital, Basel II Accord, Credit allocation

JEL Classification: G21, G28, E43

Suggested Citation

Falcone, Mariatiziana and Trivieri, Francesco and Silipo, Damiano Bruno, Basel II and Banking Behavior in Local Markets (January 20, 2009). Available at SSRN: https://ssrn.com/abstract=1330367 or http://dx.doi.org/10.2139/ssrn.1330367

Mariatiziana Falcone

affiliation not provided to SSRN ( email )

Francesco Trivieri

Università degli Studi della Calabria - Department of Economics and Statistics ( email )

via Ponte Bucci
Arcavacata di Rende, Cosenza 87036
Italy

Damiano Bruno Silipo (Contact Author)

University of Calabria ( email )

Dipartimento di Economia Politica
87036 Arcavacata di Rende CS
Italy

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