Finance Seminar（2018-19）

Topic: The Cost of Bank Regulatory Capital

Speaker: João A. C. Santos, Federal Reserve Bank of New York & Nova School of Business and Economic

Time: Friday, 28 September, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of one year, short-term commitments were not subject to a capital requirement. The Basel II Accord sought to reduce this discontinuity by extending capital standards to most short-term commitments. We use these differences in capital standards around the one-year maturity to infer the cost of bank regulatory capital. Our results show that following Basel I, undrawn fees and all-in-drawn credit spreads on short-term commitments declined (relative to those of long-term commitments). In contrast, following the passage of Basel II, both undrawn fees and spreads went up. These results are robust and confirm that banks act to conserve regulatory capital by modifying the cost and supply of credit.

Introduction:

João A. C. Santos is a Senior Vice President in the Financial Intermediation Function of the Federal Reserve Bank of New York. His research interests include financial systems design, financial intermediation, banking regulation and corporate finance. His articles have been published in the Journal of Finance, Journal of Financial Economics, Journal of Monetary Economics, European Economic Review, Journal of Financial Intermediation, Journal of Money Credit and Banking, Journal of Banking and Finance, among other journals.

Your participation is warmly welcomed!