White Papers for Basel II Capital Accord (Basel II)

A model of bank capitallending and the macroeconomy Basel I versus Basel II

The revised framework for capital regulation of internationally active banks (known as Basel II)
introduces risk-based capital requirements. This paper analyses the relationship between bank
capital, lending and macroeconomic activity under the new capital adequacy regime. It extends a
model of the bank-capital channel of monetary policy - developed by Chami and Cosimano - by
introducing capital constraints à la Basel II. The results suggest that bank capital is likely to be
less variable under the new capital adequacy regime than under the current one, which is
characterised by invariant asset risk-weights. However, bank lending is likely to be more
responsive to macroeconomic shocks.

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