[Journal:] European Financial and Accounting Journal [ISSN:] 1805-4846 [Volume:] 9 [Year:] 2014 [Issue:] 2 [Pages:] 4-27
We estimate the required increase in banks’ lending spreads assuming that banks under regulatory pressure would raise lending spreads to prevent ROE from falling when the capital regulation is tightened. We focus our analysis on six Czech banks that are under regulatory pressure, and are therefore the ones most affected by the increased capital requirement. We follow the mapping methodology presented by King (2010). We find that the required increase in lending spreads to keep ROE from falling totals 6.3 basis points. We conclude that the impact of tightened capital regulation on lending spreads in the Czech banking sector is minor. If shareholders decide to absorb some of the fall in ROE, or they take other measures to prevent a fall in ROE, the potential impact on lending spreads will be even smaller.
Lending spreads Capital requirement Capital adequacy Basel III