The Cost of Bank Regulatory Capital - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

The Cost of Bank Regulatory Capital

Number 853
June 2018

JEL classification: G21, G28

Authors: Matthew C. Plosser and João A.C. Santos

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.

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Author Disclosure Statement(s)

Matthew Plosser
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

João A. C. Santos
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

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