The Impact of the Basel III Regulatory Framework on Systematic and Idiosyncratic Risk in the Global Banking Sector

Max Demming & Linus Julian Schmitz

Student thesis: Master thesis


This paper examines the impact of the Basel III regulations on both systematic and idiosyncratic risk of internationally active banks between 2014 and 2019. It presents a review of empirical literature on the determinants of risk in- and outside of the global banking sector and uses a sample of 65 internationally active banks to investigate how the time variation of risk within the sample can be explained by the implementation of liquidity and capital measures imposed by Basel III. For robustness, the sample is divided into global systemically important banks (G-SIBs) and non-G-SIBs, systematic risk is estimated using a static approach (rolling ordinary least squares regression) and a dynamic estimate (Kalman Filter), and a distributed lag model is employed to account for potential lags of the explanatory variables. Our results show that the dynamic causal effects of the Basel measures on risk in the global banking sector is weak. This finding can be explained by the fact that the implementation of the Basel III regulatory framework is still in progress and that the overall good condition of the economy over the observation period lead to a lower impact on risk as Basel III regulations are specifically designed to add resilience to the banking sector during economic downturns.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2020
Number of pages161