Journal of Applied Finance & Banking

Basel III and Credit Crunch: An Empirical Test with Focus on Europe

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  • Abstract

    The aim of this research is to show that unless the lending business is incentivised by an appreciable earnings potential the effect of the enforcement of the Basel III capital and liquidity requirements is sure to be a credit crunch. Initially, this empirical research hypothesis was tested against a number of independent variables reflecting trends in lending volumes; subsequently, these variables were used to establish if the risks of default that corporate borrowers face under the impact of credit rationing are likely to be heightened by other factors. The research sample is a set of 2,964 banks operating in Europe in 2014. The values used to construct the variables were taken from the Bankscope (Bureau Van Dijk) and Datastream (Thomson Reuters) databases and from the end-2014 actuals of these banks. Based on their test results, the authors conclude that the need to comply with the newly-enforced Basel III requirements is responsible for a fall in aggregate bank lending and the prioritisation of forms of investment other than the lending business (for example, financial market transactions).

    JEL classification numbers: G21, G28
    Keywords: Basel III, Credit crunch, Capital requirement, Liquidity requirement, Value at risk, Operational risk.