Abstract
In 1988, an agreement was reached in Basel to set the common requirements of bank capital towards promoting the soundness and stability of the international banking system. Banks are required to hold capital in proportion to their perceived risks, which may have caused a credit crunch, resulting in a significant reduction in the supply of credit. We investigate the direct link between the implementation of the Basel Accord and lending activities using a data set spanning annual observations covering 1989-2004 for banks in Egypt, Jordan, Lebanon, Morocco, and Tunisia. The results provide clear support for a significant increase in growth following the implementation of capital regulations, in general. Despite higher capital adequacy ratio, banks expanded and assets growth. Credit growth appears to be driven by demand fluctuations attributed to real growth, cost of borrowing and exchange rate risk. Overall, the effects of macroeconomic variables, in contrast to capital adequacy, appear to be more dominant in determining growth, regardless of the capital adequacy ratio, and variation across banks by nationality, ownership, and listing.
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