Basel III and Monetary Policy

Sammanfattning: Headlined by Basel III - banking regulation has been the target of extensive revisions and remodeling in the wake of the Global Financial Crisis. The same period has, in many countries, also been characterized by unprecedented accommodative monetary policy. Since banks serve as a critical transmitter of both policies, regulatory and monetary alike, their implications on bank lending merit further investigation. This paper empirically explores the transmission of capital requirements and monetary policy - as well as their interaction - on bank lending, by employing a dynamic Least Square Dummy Variable (LSDV) model on quarterly bank-level data of 17 banks in the Nordic region of Sweden, Norway, Denmark, and Finland (the Nordic- 4) covering the period from 2013:Q1 to 2019:Q4. Our results suggest no significant bank lending channel in the region, and though our results favor an irrelevance of capital requirements in accordance with the Modigliani-Miller Theorem in most settings, the theorem appears to fail amongst small banks where a significant negative effect on consumer lending is found. Our study further contributes to the existing literature by providing additional robustness to earlier findings that the effect of capital requirements on lending is primarily prevalent amongst small banks, amidst which it further suggests that there might be a significant interaction between the two policies. Bank-specific heterogeneity in the response, along such dimensions as size, could have unintended implications on the banking system if not properly identified and considered. Especially with the rise of more homogenous regulatory treatments with the increased macroprudential focus in Basel III.