N° 46 : Basel III joint regulatory constraints: interactions and implications for the financing of the economy

We propose a simple theoretical model of bank lending decision to analyse the interactions between these various regulatory requirements and the conditions under which some constraints may bind while others may not. Building on the predictions of this theoretical model, we estimate the impact of these different regulatory requirements on lending growth, on a panel of 54 French banks since 2014. Our results indicate that three pairwise interactions, most of them involving the leverage ratio and the LCR, have a weakly significant effect on lending growth. More specifically, our results highlight a significant and partial level of substitutability between the leverage ratio and the NSFR over the entire period, resulting from the positive effect of bank own funds on liquidity. We also emphasize that the regulatory ratios interact more for banks with lower regulatory ratios and in periods of financial stress. Our results show for example that the leverage ratio interacts more with the NSFR, during such periods and for weaker banks, with the expected positive individual effect of regulatory ratios on lending growth partly offset by the effect of their interactions (the more capitalized the bank, the higher its ability to lend in crisis time).