The impact of the basel 3 capital requirements on the performance of european banks

Abstract

The financial and economic crisis of the last decade has revealed that the regulatory rules applied at that moment were not sufficient to protect the financial institutions from a failure. An excessive leverage, an inadequate amount of capital and insufficient liquidity are examples of weaknesses that amplified the severity of the crisis. In order to avoid a similar crisis, the Basel III regulatory reform has been launched. New improvements have been made about the liquidity standards, the risk coverage, the leverage and especially the strengthening of capital. Even if everyone accepts the fact that the financial system will be safer with these changes, the impact that a change in the capital requirements has on the profitability measures is still unclear. A certain number of authors believe that the higher proportion of capital will penalize the lending activities and the performance of the banks. The goal of this thesis is to test whether bank managers really have to worry about the new regulatory requirements. In order to answer this question, an empirical analysis is conducted on a sample of European banks presenting a given level of systemic risk. The period between 2013 and 2015 is chosen in this research. The results of the study show that a positive relationship exists between the level of capital, the return on assets and the return on equity. Financial institutions which hold a higher level of capital seem to generate more profitability. This positive relationship can be explained by the fact that well-capitalized banks are considered as being less risky and can have an access to funds at better conditions. Moreover, banks which have a higher capital ratio have a more efficient behaviour, make stronger monitoring efforts and make better lending decisions. The results also demonstrated that the cost-to-income ratio, the loans-to-deposits ratio, the GDP growth rate and the dividend payout ratio have an impact on the profitability measures.