The Basel Accord and Financial Intermediation: The Impact of Policy

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Federal Reserve Bank of St Louis
© 2018, Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the Bank of Canada, the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.
This article studies loan activity in a context where banks have to follow Basel Accord–type rules and find financing with the households. Loan activity typically decreases when investment returns of entrepreneurs decline, and we study which type of policy could invigorate an economy in a trough. The authors find that an active monetary policy increases loan volume even when the economy is in good shape, while the introduction of an active capital requirement policy is also effective if it implies tightening of regulation in bad times. This is performed with a heterogeneous agent economy with occupational choice, financial intermediation, and aggregate shocks to the distribution of entrepreneurial returns.
FEDERAL RESERVE BANK OF ST LOUIS REVIEW, 2018, 100 (2), pp. 171 - 200