The impact of Basel II on the banking strategies in the Middle East and North African (MENA) region

In the last two decades, regulators have increased their focus on the capital adequacy of banking institutions in order to enhance the stability of the financial system. A major step in that direction are minimal risk- = based capital requirements for banks, referred to as the Basel II Accord. The purpose of this study is to examine the extent to which bank capital regulation, measured by Basel II implementation, has affected the willingness of banks to lend or invest in other assets. This study differs from past ones in that it uses a cross-section time series data set spanning annual observations covering 1997-2013 for individual banks in Egypt, Jordan, Lebanon, Morocco and Tunisia. In general, the results provide clear support for an increase in credit growth following the implementation of capital regulations. Despite higher capital adequacy ratios, banks extended lending and grew assets, including their holding of government securities. Credit growth appears to reflect demand instabilities ascribed to real growth, cost of borrowing and exchange rate risk. Generally, macroeconomic variables, in contrast to capital adequacy, seem to prevail in predicting credit growth, irrespective of the capital sufficiency. © 2016 Macmillan Publishers Ltd.