Did Basel II reduce lending in emerging markets?

Abstract

This thesis shows that implementing Basel II capital adequacy requirements in emerging markets did not lead banks to reduce lending. This contrasts with banks in high-income countries, which respond to a tightening of capital adequacy requirements by curtailing credit. The difference can likely be attributed to variations in capitalization levels: banks in emerging markets are well-capitalized and need not adjust their behavior when capital adequacy requirements are increased. Contrarily, banks in high-income countries maintain low capital adequacy ratios and are forced to reduce lending in the face of more stringent requirements. These results were obtained using a dataset comprising individual data for 899 banks in 97 countries over the period 2005 to 2012. The findings remove a major argument against continuing to roll out Basel II across emerging markets: that doing so would reduce lending and consequently hamper economic growth. This does not seem to be the case.