Base III and bank lending channel evidence in BRICS nad OECD countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS BASEL III AND BANK LENDING CHANNEL: EVIDENCE IN BRICS AND OECD COUNTRIES BY NGUYEN THI HONG VAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2017 i UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS BASEL III AND BANK LENDING CHANNEL: EVIDENCE IN BRICS AND OECD COUNTRIES A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI HONG VAN Academic Supervisor: LE HO AN CHAU HO CHI MINH CITY, December 2017 DECLARATION “I certify the content of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees I certify that, to the best of my knowledge, any help received in preparing this dissertation and all source used, have been acknowledged in this dissertation.” Signature Nguyen Thi Hong Van Date: December 15th 2017 i ACKNOWLEDGEMENT Foremost, I would like to express my sincere gratitude to my supervisor Dr Le Ho An Chau, for her patience, motivation, enthusiasm, sympathy, immense knowledge, and for giving me valuable advice Her guidance helped me at all the time of research and writing of this thesis In addition my advisor, I would like to thank Prof Nguyen Trong Hoai and Dr Pham Khanh Nam who have their expertise view with me, the valuable experience in research, and Dr Truong Dang Thuy who has provided the practical econometric technique, a valuable knowledge in research Furthermore, I would also like to thank all lecturers and staff at the Vietnam Netherlands Program who already supported me wholeheartedly during my studying time in there In particular, I would like to express my gratitude and affection towards my family, especially my mother who sacrifices so much for this family, who always devotes all love and all the best interest for me ii ABSTRACT Basel committee on banking supervision (BCBS) promulgated Basel III regulations with more tightened operating conditions in the banking sector This improvement of BCBS has brought about a lot of arguments Some researchers suppose that Basel III regulations raise the marginal cost and reduce bank lending, but others believe Basel III regulations can improve the banking system and increase the financial shocks absorbability To investigate the impact of Basel III on bank lending channel, this study utilizes data collected from 391 commercial banks in 10 countries (BRICS and countries of OECD) from 2011-2016 The empirical results from three stages least square under generalized structural equation model (GSEM) show that there is the disparity impact of Basel III regulations on bank lending channel between BRICS and countries of OECD Specifically, there is the significant negative impact of Basel III liquidity regulations and time dummy variable but no significant capital regulation effects on bank lending channel in BRICS countries The possible reason is that capital ratios (Tier ratio, Common equity tier ratio, and leverage ratio) of commercial banks in BRICS were higher than Basel III regulations in the period 2011-2016 They have not had too much pressure on adapting capital requirements of Basel III regulations In contrast, in the countries of OECD, there are no evidence to prove time dummy variable and the liquidity regulations effect on bank lending channel, nevertheless, the capital requirements of Basel III have a significant negative impact on bank lending channel Keywords: Basel III, Bank lending channel, Capital requirements, Liquidity regulations, BRICS, OECD JEL Classification: G32, G38, E52, E42 iii TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii TABLE OF CONTENTS iv LIST OF TABLE vi LIST OF FIGURES vii LIST OF ACRONYMS viii CHAPTER INTRODUCTION 1.1 Problem statement 1.2 Research objectives: 1.3 Research methodologies and data 1.4 Research contribution 1.5 The thesis structure CHAPTER LITERATURE REVIEW ON BANK LENDING CHANNEL AND BASEL III REGULATIONS 2.1 Theoretical review on bank lending channel and Basel III regulations 2.1.1 Bank lending channel 2.1.2 Basel III on bank regulations 2.1.3 Basel III effects on bank lending channel 10 2.2 Empirical review on the effect of Basel III regulations on bank lending channel 13 2.3 Hypothesis construction and the conceptual framework 18 2.3.1 The conceptual framework 18 2.3.2 The hypothesis construction 18 CHAPTER RESEARCH METHODOLOGY 20 3.1 Data sources 20 3.2 Research methodology 20 3.2.1 Model specification 23 3.2.2 Measurement variables 26 CHAPTER THE EMPIRICAL RESULTS 29 4.1 Data descriptions 29 iv 4.2 The impact of Basel III regulations on bank lending channel 36 4.2.1 The impact of Basel III regulations on bank lending channel in 10 countries 36 4.2.1 The impact of Basel III regulations on bank lending channel in BRICS 38 4.2.1 The impact of Basel III regulations on bank lending channel in countries of OECD 41 CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 44 5.1 Concluding remarks 44 5.2 Policy implications 45 5.3 The limitation and further researches 45 REFERENCES 46 APPENDIX 54 v LIST OF TABLE Table 3.1 The descriptions’ definition and measurement unit of variables 24 Table Descriptive statistics of variables 29 Table The correlation table 35 Table Bank lending channel with each effect of Basel III regulations in total 10 countries 37 Table 4 Bank lending channel with each effect of Basel III regulations in BRICS 38 Table Bank lending channel with each effect of Basel III regulations in countries of OECD 41 vi LIST OF FIGURES Figure The simplified measurement for NSFR 12 Figure 2 Scenario to approach the NSFR 13 Figure The conceptual framework 18 Figure 1The recursive relationship 21 Figure The loan growth distribution of 10 countries from 2011 to 2016 30 Figure The loan growth distribution of countries in OECD from 2011 to 2016 31 Figure The loan growth distribution of BRICS from 2011 to 2016 31 Figure 4 The interest income ratio distribution of 10 countries from 2011 to 2016 32 Figure The interest income ratio distribution of countries in OECD from 2011 to 2016 33 Figure The interest income ratio distribution of BRICS from 2011 to 2016 33 vii LIST OF ACRONYMS 3SLS Three-Stage Least Square BCBS Basel committee on banking supervision BIS The Bank for International Settlement BLC Bank lending channel BRICS Brazil, Russia, India, China, South Africa DSGE Dynamic Stochastic General Equilibrium ECM Error Correction Model GMM Generalized Method of Moment GSEM Generalized Structural Equation Model OECD The Organisation for Economic Co-operation and Development SVAR Structural Vector Autoregressive VAR Vector Autoregressive VECM Vector Error Correction Model viii 58 Source: BCBS (2013) Appendix 5: The impact of Basel III on bank lending channel in 10 countries  TIER1 RATIO reg3 (LG = TIER1 LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = TIER1 LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) Three-stage least-squares regression 59  COMMON EQUITY TIER1 RATIO reg3 (LG = CET1 LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = CET1 LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) Three-stage least-squares regression 60 61  LEVERAGE RATIO reg3 (LG = LEV LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = LEV LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) Three-stage least-squares regression 62 Appendix 6: The impact of Basel III on bank lending channel in BRICS  TIER1 RATIO reg3 (LG = TIER1 LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = TIER1 LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) if idcount ==1 63 64  COMMON EQUITY TIER1 RATIO reg3 (LG = CET1 LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = CET1 LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS)if idcount ==1 65  LEVERAGE RATIO reg3 (LG = LEV LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = LEV LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) if idcount == 66 67 Appendix 5: The impact of Basel III on bank lending channel for countries of OECD  TIER1 RATIO reg3 (LG = TIER1 LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = TIER1 LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) if idcoun t ==0 68  COMMON EQUITY TIER RATIO reg3 (LG = CET1 LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = CET1 LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS)if idcount ==0 69 70  LEVERAGE RATIO reg3 (LG = LEV LAR i.YEAR l.LG LLP l.TA NPLR II l.GDPG l.MSG IBB) (II = LEV LAR i.YEAR l.LG LLP l.TA NPLR IER NIER INBR l.IFL IRS) if idcount == 71 72 ... review on bank lending channel and Basel III regulations 2.1.1 Bank lending channel 2.1.2 Basel III on bank regulations 2.1.3 Basel III effects on bank lending channel. .. effect of before and after applying Basel III on bank lending channel In 2013, 10 countries (BRICS and countries of OECD) already applied Basel III regulations After applying Basel III regulations,... of Basel III regulations in total 10 countries 37 Table 4 Bank lending channel with each effect of Basel III regulations in BRICS 38 Table Bank lending channel with each effect of Basel III