Basel II and the money supply process: some empirical evidence from the Greek banking system

Abstract

The purpose of this article is to examine the Basel II influence on the money endogeneity process in the Greek banking system. The importance of equity, through Basel II directives, is initially discussed by creating and applying a ‘new credit (equity) multiplier’. Then a new multivariate loan model, which contains bank's equity as explanatory variable, is briefly presented and next tested. From the econometrics, it is obvious that although the equity multiplier is not operative, the loan model favours Structuralism regarding the Greek monetary system and its money supply process.

Notes

¹More analytically, the loan supply function will have the following functional form: . On the other hand, the demand for loans is expected to have the following functional form: . Then they are equated (e.g. L^S = L^D = L^e ).

²These banks are Ethniki, Eurobank, Alpha, Piraeus, A.T.E. and Emporiki. Every variable implemented in our econometric models (e.g. Loans, Equity and the Interbank proxy (ER, Excess Reserves)) is constructed as a summation derived from the Financial Statements and the Annual Balance Sheets of these six banks. The corresponding data have been deposited in the Centre for Planning & Economic Research (CPER) archive and they are available upon request.

³Note here that the Residential part of the loans variable is weighted with 0.50, as it is recommended by the Basel II.

⁴Athanassiou (2006) presented and analysed the Household Credit to GDP ratio of Greece which is low relative to the Eurozone's countries.