The New Basle Accord: Which Implications for Monetary Policy Transmission?

Abstract

The model shows how monetary policy affects the supply of bank loans, highlighting the difference between bank reaction to a monetary shock in the short run (fixed equity) and in the long run (endogenous equity). Results: I) Capital requirements matter, even if banks are well capitalized: the impact of monetary policy increases in the long run, when banks adjust their equity to the new level of market interest rates. II) Under the New Basle Accord, monetary policy has perverse effects on riskier borrowers, when banks lack equity: an expansionary policy leads to a contraction of bank loan supply to them.