The Effect of Minimum Capital on the Hungarian Loan Interest Rates

Abstract

The aim of the research is to examine the level of loan interest rates, in line with minimum capital level increase in  the Hungarian banking sector. The model uses the  mapping method, with aggregated data for the banking  sector, which determines the increase in the loan interest  rate in case of a 1% per cent capital adequacy ratio  increase. The basic assumption of the model is that the  bank’s profitability will remain constant and the bank’s  business strategy and portfolio risk will remain the same. In  order to identify the differences in the size of the  financial institutions, the Hungarian commercial banks are  grouped in three categories on the basis of their total  assets (small, medium and large banking groups). Based on  the results, a 1 per cent increase in the capital adequacy  ratio for large banks shows the highest 18bp  increase in the interest rates of the loans. The loan interest  rate increase is not significant and it is in line with the  results of the previous empirical research. The analysis  contributes to the assessment of the relationship between  capital regulation and bank profitability and helps to  predict the growth of credit interest rates in an increasing  minimum capital level or base rate environment.