Topic: The cost of bank regulatory capital
Speaker: Joao Santos, Senior Vice President & Policy Lead for Microprudential Supervision, Federal Reserve Bank of New York
Date: September 25 (Tuesday)
Location: Building 4 Room 102
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.
About the speaker:
João Santos is Senior Vice President and Policy Lead for Microprudential Supervision at the Federal Reserve Bank of New York. He is also Professor at Nova School of Business and Economics. His research interests include financial systems design, banking, banking regulation and corporate finance. His articles have been published in various academic journals including the Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Monetary Economics, Journal of Accounting and Economics, Journal of Money Credit and Banking, European Economic Review, Journal of Financial Intermediation, and the Review of Finance. He is a Co-Editor of the Journal of Financial Intermediation, and an Associate Editor of various journals including the Journal of Money Credit and Banking and the Journal of Financial Services Research.