Basel II and Banking Behaviour in a Dualistic Economy

  • Mariatiziana Falcone
  • Damiano B. Silipo
  • Francesco Trivieri


The chapter 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.


Interest Rate Capital Requirement Capital Charge Systemic Risk Factor Banking Behaviour 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Bentivogli, C., Cocozza, E., Foglia, A., Iannotti, S. (2007). Basilea II e i rapporti banca-impresa: Un'indagine del cambiamento. Banca Impresa Società,26, 91–112.Google Scholar
  2. Cannata, F. (2006). Gli effetti di Basilea 2 sulle banche italiane: I risultati della quinta simulazione quantitativa. Occasional papers 3, Banca d'Italia.Google Scholar
  3. Chiuri, M. C., Ferri, G., & Majnoni, G. (2002). The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future. Journal of Banking and Finance,26, 881–904.CrossRefGoogle Scholar
  4. Diamond, D. W., & Rajan, R. G., (2000). A theory of bank capital. Journal of Finance,55, 2431–2465.CrossRefGoogle Scholar
  5. Fabi, F., Laviola, S., & Marullo Reedtz, P. (2005). The new Capital Accord and banks' lending decisions. Journal of Financial Stability,1, 501–521.CrossRefGoogle Scholar
  6. Gambacorta, L., & Mistrulli, P. E. (2004). Does bank capital affect lending behaviour?Journal of Financial Intermediation,13, 436–457.CrossRefGoogle Scholar
  7. Hakenes, H., & Schnabel, I. (2006). Bank size and risk-taking under Basel II. Manuscript.Google Scholar
  8. Hancock, D., Lehnert, A., Passmore, W. (2006). The competitive effects of risk-based bank capital regulation: An example from U.S. mortgage markets. Working paper.Washington, DC: Federal Reserve Board.Google Scholar
  9. Holmström, B., & Tirole, J. (1997). Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics,112, 663–691.CrossRefGoogle Scholar
  10. Jackson, P., Furfine, C., Groeneveld, H., Hancock, D., Jones, D. (1999). Capital requirements and bank behaviour: The impact of the Basle Accord. Working papers 1, Basle Committee on Banking Supervision.Google Scholar
  11. Jacques, K. T. (2008). Capital shocks, bank asset allocation, and the revised Basel Accord. Review of Financial Economics,17, 79–91.CrossRefGoogle Scholar
  12. Lang, W. W., Mester, L. J., & Vermilyea, T. A. (2007). Competitive effects of Basel II on U.S. bank credit card lending. Working Paper 07. FRB of Philadelphia.Google Scholar
  13. Liebig, T. D., Porath, B., Weder, B.(2007).Basel II and bank lending to emerging markets: Evidence from the German banking sector. Journal of Banking and Finance,31, 401–418.CrossRefGoogle Scholar
  14. Repullo, R., & Suarez, J.(2004).Loan pricing under Basel capital requirements. Journal of Financial Intermediation,13, 496–521.CrossRefGoogle Scholar
  15. Repullo, R., & Suarez, J. (2007). The Procyclical effects of Basel II. Manuscript.Google Scholar
  16. Sironi, A., & Zazzara, C.(2003).The Basel Committee proposals for a new capital accord: Implications for Italian banks. Review of Financial Economics,12, 99–126.CrossRefGoogle Scholar
  17. Ughetto, E., & Scellato, G. (2007). The Basel II reform and the provision of finance for R&D activities in SMEs: An analysis for a sample of Italian companies. Manuscript.Google Scholar
  18. VanHoose, D. (2007).Theories of bank behaviour under capital regulation. Journal of Banking and Finance,31, 3680–3697.CrossRefGoogle Scholar

Copyright information

© Springer Physica-Verlag Berlin Heidelberg 2009

Authors and Affiliations

  • Mariatiziana Falcone
    • 1
  • Damiano B. Silipo
    • 1
  • Francesco Trivieri
    • 1
  1. 1.Dipartimento di Economia e StatisticaUniversità della CalabriaRendeItaly

Personalised recommendations