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The new Basel Capital Accord (Basel II), published in its final form in June 2006, established new and revised capital requirements for banks. In this paper the authors analyze and estimate the possible effects of the new rules on the pricing of bank loans. They do that for the two approaches for capital requirements (Internal and Standardized) available to banks and make a distinction between retail (mainly households) and corporate customers. The loan equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. They use Israeli economic data and data of a leading Israeli bank, including probability of default of its retail and corporate customers.
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