Monetary Policy with a Touch of Basel

By R. Chami, T. Cosimano. Social Science Research Network, 2001

179 citations recorded by the source corpus.

The unfolding subprime crisis and the challenges facing central banks in using monetary policy to resolve the possible credit crunch, highlight the importance of understanding the relationship between monetary policy and risk-based capital requirements. We explore the implications of risk-based capital requirements, ?la Basel, for the conduct of monetary policy. A "bank balance-sheet channel" of monetary policy is identified, which operates through bank capital and influences the bank's loan decision. Using a dynamic banking model, we endogenize the capital decision and show that banks are likely to hold capital above the regulatory minimum to avoid being constrained. We derive the option value of holding capital, and show how this value is affected by monetary policy, level of economic activity, structure of the banking industry, and by changes in the level of regulatory capital.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7104c33c93cf850f75e2ee89827c9ea540738fc3

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Citations in the corpus

Bank Behavior in Response to Basel III: A Cross-Country Analysis (2011, methodology): “First, the paper derives empirically testable relations from a structural model of the capital channel of monetary policy developed by Chami and Cosimano (2010). In doing so it follows Barajas, Chami, Cosimano, and Hakura’s (2010) analysis of large bank holding companies in the United States.”
Do Capital Adequacy Requirements Matter for Monetary Policy (2008, unknown): “Chami and Cosimano (2001) suggested that bank capital is sensitive to the real interest rate and so can be influenced bymonetary policy.”
A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis (2012, background): “above the regulatory minimum of 4 percent, Chami and Cosimano (2010) demonstrate that banks”