Basel III and its Effects on Banking Performance: Investigating Lending Rates and Loan Quantity

Abstract

In late 2010, the Basel Committee on Banking Supervision issued the Basel III document enumerating measures focused on improvements in the definition of regulatory capital, introduction of a leverage ratio as a backstop for risk-based capital requirement, capital buffers, enhancement of risk coverage through improvements in the methodology to measure counterparty credit risk and liquidity measurement standards. This study investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks' marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that assuming a 1.3 percentage point increase in the equity-to-asset ratio to meet the Basel III regulations, the country-by-country estimations imply a reduction in the volume of loans by an average 4.97 percent in the long run for the banks in countries that experienced a crisis and by 18.67 percent for the banks in countries that did not experience a crisis. The wide variance in the results reflects crosscountry differences in the elasticity of loan demand with respect to loan interest rateand bank's net cost of raising equity.

The determinant of African banks’ capital structure: Basel III Accord or bank-specific factors?

“…Hypothesis 3) have a positive effect on the leverage ratio. This result is consistent with the general argument of studies such as Gavalas and Syriopoulos (2018), Klefvenberg and Mannehed (2017), Beltratti and Stulz (2012), Berger and Bouwman (2013) and Lim (2016) who argue that despite all the sources of funding available to banks, they rely heavily on debt capital to meet their investment and operational funding requirements. The argument is based on the assumption that banks tend to be highly profitable and therefore enjoy tax shields on debt interest over heavy reliance on debt financing.…”

“…This is because as banks tend to be highly profitable, they enjoy the debt interest tax shields from heavy reliance on debt funding (Beltratti & Stulz 2012;Klefvenberg & Mannehed 2017). Gavalas and Syriopoulos (2018) argued that the Basel III minimum capital index has a direct positive impact on the capital structure of Brazilian banks. Also, Lim (2016) and Berger and Bouwman (2013) argue that the tighter MCR positively influences the capital structure of banks.…”

The Financial Crisis, Basel Accords and Bank Regulations: An Overview

“…Regarding the influence of higher capital requirements on volume of loans across countries, Gavalas and Syriopoulos (2014) suggest that the results vary from one country to another due to differences in loan demand elasticity and argue that increase of 1.3 percentage point in the capital ratio implies decrease in the volume of loans by 4.97 percent for banks in countries that experienced a crisis and by 18.67 percent for banks in countries not experiencing a crisis. Using simultaneous equations model in a sample of 594 banks in the European Union during the period from 2006, Sútorová and Teplý (2013 provide empirical evidence that level of loans is decreased by 2% only because first, lending rates are increased by only 18.8 basis points for one percentage point increase in the capital ratio, second, most of the ISSN 2162-3082 2017 European banks are already complying with the capital requirements, and third the elasticity of demand for loans is low in the EU.…”

Financial theory approach to the investigation of the impact of Basel III capital adequacy on commercial banks

“…Míra přenosu vícenákladů na zákazníky totiž závisí na míře konkurence na bankovním trhu. Elasticita poptávky po úvěrech, stejně jako nákladnost navýšení kapitálu banky prostřednictvím emise nových akcií, se mohou na jednotlivých trzích výrazně lišit (Cosimano a Hakura, 2011;Gavalas a Syriopoulos, 2014). Úvěrová nabídka banky nemusí vždy vycházet z aktuálního kapitálového mixu, ale naopak struktura pasiv banky může být ovlivněna odhadovanou budoucí poptávkou po úvěrech (Šúturová a Teplý, 2013 …”