Basel III: Implications for the Danish banking sector

Abstract

The recent financial crisis revealed the vulnerability of the banking industry as several institutions failed because of poor liquidity and asset and liability management. As a response the Basel Committee released Basel III which is a capital and liquidity framework that aims at increasing the resilience of the financial sector. This thesis investigates the new capital and liquidity requirements proposed by the Committee and compares it to the previous frameworks. Moreover, there is made an assessment of how Basel III will impact Danish banks and mortgage credit institutions. A scenario analysis is done to explore the effects of the enhanced capital requirements. The findings reveal that Danish financial institutions will have to restructure their balance sheets to comply with the new framework. There will generally be a need to raise more high quality equity and to finance activities with more long-term funds. For the financial sector this translates in to higher funding costs and lower returns.