Discussion Paper

No. 2017-53 | August 17, 2017
The impact of Basel III on money creation: a synthetic analysis

Abstract

Recent evidences provoke broad rethinking of the role of banks in money creation. The authors argue that apart from the reserve requirement, prudential regulations also play important roles in constraining the money supply. Specifically, they study three Basel III regulations and theoretically analyze their standalone and collective impacts. The authors find that 1) the money multiplier under Basel III is not constant but a decreasing function of the monetary base; 2) the determinants of the bank’s money creation capacity are regulation-specific; 3) the effective binding regulation and the corresponding money multiplier vary across different economic states and bank balance sheet conditions.

JEL Classification:

E51, G28, G18, E60

Assessment

  • Downloads: 160

Links

Cite As

Wanting Xiong and Yougui Wang (2017). The impact of Basel III on money creation: a synthetic analysis. Economics Discussion Papers, No 2017-53, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-53


Comments and Questions


Anonymous - Invited Reader Comment
August 24, 2017 - 08:51

My overall impression is that the paper touches upon a very important subject, which has international implications, such as Basel III and the impacts on money creation.
It is also based on appropriate theoretical concepts (i.e. endogenous theory of money creation) and methodologies (e.g. stock flow consistent model).
Its main ...[more]

... findings are also very interesting and coherent.When authors mention that the same policy action may have distinct consequences in different scenarios,they highlight the importance of path dependence in events. Therefore, when authors draw policy recommendations, they are aware that policy makers should not look for "one size fits all" policies. Instead, they should be cautions in choosing the most appropriate instrument for each circumstance.


Yougui Wang - The authors' response
August 31, 2017 - 14:23

Thank you very much for your valuable comments!
The main findings that you highlighted here indeed have important policy implications, which are closely related to monetary policy and banking regulations. These findings are drawn from the new perspective that banks are the creators of money. When banks make lending, they ...[more]

... create both loans and deposits at the same time. The bank’s ability to create money depends on its balance sheet structure and all the requirements it is subject to. With the attenuation of the reserve requirement as a policy tool and regulatory constraints in modern banking system, we emphasize on the increasingly important roles of prudential regulations in money creation. We hope that our results could contribute to the understandings of the non-linear response of the broad money supply to the shocks on the monetary base, and further the transitions of monetary transmission under prudential regulations.