The effect of capital requirement regulation on the transmission of monetary policy: evidence from Austria

Abstract

Monetary Policy Transmission, Bank Lending Channel, Bank Capital Channel, Austria, E4, E5,

Banks’ regulatory buffers, liquidity networks and monetary policy transmission

“…Hence, in order to test the bank capital channel, we extend the standard model used in the empirical literature (see, for instance, Kashyap and Stein (2000); ____________________ 10 Some other studies use "excess capital" synonymously for "capital buffer." 11 Engler et al (2005) interpret this result in the context of the traditional bank lending channel, since they cannot find any evidence that Austrian savings banks and credit cooperatives perform significant maturity transformation. Worms (2003); Gambacorta and Mistrulli (2004) The intuition behind our specification is the following: Banks are monopolistic competitors, who choose an optimal combination of loan interest rate and loan supply, taking the expected costs of falling below the capital requirement and of re-financing into account.…”

“…Hence, three studies on European countries (Austria, Italy, and Switzerland) use regulatory data. They do, in fact, find evidence supporting the bank capital channel, as banks with lower regulatory capital buffers 10 are found to react more restrictively to a monetary tightening (Engler et al, 2005;Gambacorta and Mistrulli, 2004;Bichsel and Perrez, 2005). 11 There is no microeconometric study for Germany so far that uses regulatory capital to analyze the transmission of monetary policy.…”

Banks' Regulatory Buffers, Liquidity Networks and Monetary Policy Transmission

“…Engler et al (2005) interpret this result in the context of the traditional bank lending channel, since they cannot find any evidence that Austrian savings banks and credit cooperatives perform significant maturity transformation.…”

Basel II: An Example of 'Smart' Regulation

“…On the other hand, they can tailor their modeling approaches to the particular constellation of market, operational, and credit risks to which they are exposed. Because the capital adequacy requirement acts as a "tax" for banks, they will respond by using capital arbitrage as a mean of avoiding the "tax" (Engler &Terhi, 2005). To prevent excessive arbitrage activity, regulators must design an "optimal" risk-weighting system.…”