The Impact of a Shortage of Credit on Price-Regulated and Unregulated Markets

New Basel III regulations are said to encourage a credit crunch because of the increase in the required equity capital for banks (The Economist, 28th of Sep 2012). Since banks have higher costs to acquire equity or start deleveraging, banks raise their interest rates to cover the cost. In the real economy the impact on firms can be found in the increase in the costs of bank loans. Less firms will invest and firms might decrease their production because of the increasing costs. This paper will examine the influence of a decrease in credit supply on price-regulated and unregulated markets. One might ask whether the effect of a capital shortfall on price and quantity is larger in price-regulated markets than in unregulated markets.