Basel III: New financial regulatory standards and implications for the European banking sector

Jacqueline Christiansen

Student thesis: Master thesis

Abstract

The global financial crisis has revealed the vulnerability of the banking sector, and demonstrated that the ability of banks to absorb shocks need to be strengthened. Since 2007, financial tensions have repeatedly emerged revealing that the exposure of banks was too high and too risky in relation to their capital levels. As a result, they had too little capital to absorb losses on the market positions they had taken and on the loans they had granted. As a consequence, several financial institutions failed while others were plunged into liquidity problems. As a response, the Basel Committee has developed a raft of measures on capital and liquidity standards (Basel III), designed to strengthen the banking system and make it more resilient. This paper aims to explore and investigate the new capital and liquidity standards proposed by the Basel Committee by making a comparison with the previous capital adequacy frameworks. Due to the fact that the new regulations are going to be a “game changer” for the banking sector, an assessment is made on how Basel III will impact European banks. A quantitative analysis is done to explore the effects of the new liquidity standards, with a quantitative scenario analysis being done to estimate the effects of the enhanced capital requirements on the sampled banks. Based on the liquidity analysis, most banks are greatly impacted by the minimal liquidity requirements with the NSFR posing a greater challenge. The analysis on minimal capital requirements reveals that, most banks in the study are sufficiently capitalized to meet the requirements. However, balance sheet restructuring will have to be undertaken with a change of banks business models being considered in order to comply with the extra liquidity requirements. From the findings, European banks will find it costly and challenging to raise high quality equity capital and to finance their activities with long-term funding and deposits. For the financial sector, it will translate into higher funding costs and lower returns. In turn, banks will pass on these costs to consumers in terms of higher lending rates and constraint lending.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2012
Number of pages129