Capital Structure in the Banking Sector: Impact of the Basel III Framework

Nanna Aasted Bøjesen

Student thesis: Master thesis


The standard textbook answer concerning the determination of capital structure in the banking sector has always been that capital regulation provides the ultimate overriding departure from the theories, however the Basel framework have yet not been able to live up to that prophecy. Transition to the new Basel III accord commenced on 1 January 2013 and with the multiple refinements and im-provements the framework has been greatly improved; hence the question is then whether it will prove a worthy contender of becoming the deciding factor in relation to capital structure. Data for a sample group consisting of the 24 largest banks in Europe stretching over a period of seven years (2005-2011) was subject to analysis and showed that an impact of the Basel III frame-work was to be found. The impact is established as the development in the risk-weighted capital ra-tios experiences a significant increase in the middle of the period and then continues the upward climb, though at a much slower rate in the latter years of the sample period. Holding the capital ratios of the sample group against the new standard requirements of Basel III, the ratios for the sample group are found to be more than meeting the requirements. When dissecting the ratios it appears that the progression is mostly due to the rise in the underlying capital bases but also in some degree to the decline in the denominator, the risk-weighted assets. Furthermore, when looking at the development in the leverage ratio which is a new non-risk-based measurement, the standard of minimum 3 percent of Tier 1 Capital to total exposure is also being fulfilled. As with the risk-based ratios the increase in the leverage ratio is also primarily being driven by the progression in the Tier 1 capital base. Supplementary to the analysis of the progression of the sample group’s capital ratios, a survey of the outstanding amounts of quoted shares issued in the EU along with its growth rates is performed which reaffirms the findings of an impact by Basel III. However, even though documenting an impact by the Basel III framework in the latter years of the sample period in both the survey for the overall development of the common shares issued the EU and in the development for the risk-based and non-risk-based capital ratios of the sample group, the equity component in the capital structure for the sample group continues to play a very little role and the overall capital structure for the 24 banks remains unchanged. The thesis thereby finds that Basel III is currently not a determinant of first order importance and is deemed not to have the potential to become one.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2013
Number of pages91