Banking System Adjustment to Regulatory Capital Requirements

Abstract

The main objective of this paper is to explore the adjustment of bank business activities to new regulatory capital requests using panel data analyses of the European banking system. The research hypothesis assumes that the increase in capital requirements affects the banks' balance sheet adjustment and bank lending to the non-financial sector. The banks can maintain the higher regulatory capital ratio by increasing the volume of share capital or by decreasing the risk-weighted assets and bank lending activities. The high equity premium upon a new equity issue due to asymmetric information about the bank's net worth discourages the current shareholder to issue additional capital, which has resulted in bank lending constraints and has increased non-risk bank assets. Banks' response to new capital requirements can announce a long-term negative impact to real Ivica Klinac economy and bank depending borrowers. The model of empirical analysis of the banking sector adjustment to new capital requirements will be demonstrated on the sample of publicly listed banking firms in the European Union in the period 2000-2016 using dynamic panel-data estimation with the Generalized Method of Moments (GMM) in one-step.

Does Credit Growth in the EMU Banking Sector Follow its Capital Adequacy?1

“…Firstly, looking into the development of supervisory function from its fundamentals, from Herstatt risk in 1974 (NORD/LB, 2017) on and see Chart 3 linear regression for 89 quarterly observations of pairs of dependent and independent variables, the density of actual points offsets and confirm Basel standard development. If we only extract 6%, 8% and 10% capital adequacies of the independent variable (x) with relevant growths of loans granted by MFI to NFI as dependent variables (y) we can generally confirm that the Basel Committee and Banking Supervision (BCBS) based standards and principles regulation framework has been accepted in general and followed by all current member countries, taking data on the whole EMU level (19) back from the first quarter of 1999.…”

“…The high equity mark-up in the recapitalization processes due to asymmetric information about the bank's net worth makes it not very attractive to the existing and possible future shareholders to pay in additional capital. This increased bank lending barriers and led banks to invest in lower-risk assets which are also of lower profitability (Klinac & Ercegovac, 2018).…”

“…They find that banks in countries with more restrictive regulatory frameworks perform better and the better-performing banks have more equity. Klinac, Pesa, & Bolfek (2019) researched the sample of 35 listed bank groups in the period from 2000 to 2016 which are market makers of the EU. The model shows that the required increase in capital position causes a decrease in credit activity in the non-financial sector.…”