The Effect of the Basel Accord on Bank Lending in Japan

Abstract

This study investigates the hypothesis that stricter capital adequacy requirements introduced under the 1988 Basel Accord caused Japanese banks to restrict loan growth. Using a panel of Japanese bank balance sheets for fiscal years 1982-1999, this study finds that the 1988 Basel Accord regulation requiring international banks to hold a BIS (Bank for International Settlements) capital to risk-weighted asset ratio of at least 8% increased the sensitivity of total loan growth to capitalization for international banks in Japan. A similar, but quantitatively smaller, finding is reported for a group of "switcher" banks that initially pursued the 8% BIS capital adequacy requirement following the signing of the Basel Accord in 1988, but then later switched to pursue a domestic 4% MOF (Ministry of Finance) capital adequacy requirement. Domestic banks, which were subject to the 4% MOF capital adequacy requirement for the entire post-Basel period, show no evidence of increased sensitivity of lending to capitalization in the post-Basel period.Japanese Banks, Capital Adequacy, Basel Accord, Credit Crunch