How does bank equity affect credit creation? Multiplier effects under Basel III regulations

Both equity and regulation play key roles in determining the ability of banks to create credit. Equity varies endogenously, while regulations are exogenously imposed. This study proposes a banking model investigate how changes bank due interest receipts expenditures affect credit money creation under Basel III regulations. Four regulations—the capital adequacy ratio, leverage liquidity coverage net stable funding ratio—are discussed. Their effect on demonstrated by that occur supply response arising from payments. identifies seven regulatory scenarios these four In each scenario, there exists multiplier relates change resultant supply. Correspondingly, is sheds new light creation. • Banks respond their creating money. Then exist effects shows Each scenario specifies two multipliers determine Under ratios, increasing may reduce