Although beneficial allocational effects have been a central motivation for the Basel II capital adequacy reform, the interaction of these effects with Basel II's procyclical impact has been less discussed. In this paper, we investigate the effect of Basel II on the efficiency of bank lending....

We show in a theoretical model that the introduction of the leverage ratio requirement, when it interacts with the risk-based IRB capital requirements, might lead to less lending to low-risk customers and to increased lending to high-risk customers. If such allocational effects are...

We study the effects on credit allocation and bank stability of introducing a leverage ratio requirement (LRR) on top of risk-based capital requirements, as in Basel III. For the current 3% LRR, both low-risk and high-risk loan rates and volumes remain essentially unchanged, because banks...

Although beneficial allocational effects have been a central motivator for the Basel II capital adequacy reform, the interaction of these effects with Basel II's procyclical impact has been less discussed. In this paper, we investigate the effect of capital requirements on the allocation of...