The Impact Of Basel III On Italian Banks’ Loan Rates: An Accounting-Based Approach

This paper empirically investigates the impact of the new capital requirements imposed under Basel III on bank lending rates. A general accounting equilibrium model is developed in order to map the change in the average interest rate on bank loans which is required to preserve the economic performance and the market value of financial institutions under the new regulatory framework. The study refers to the Italian banking system. According to our estimates, the long-term impact of heightened capital requirements on bank loan rates is likely to be modest. In our baseline scenario, we find evidence that each percentage point increase in the capital ratio can be recovered by increasing interest rates with which borrowers are charged by only 5.75 basis points. We conclude that the Italian banking system should be able to adjust to the higher capital requirements imposed by Basel III through a set of operative and commercial levers with no significant effects on the cost of credit for companies and consumers.