Basel III and Banking Efficiency

• The overall aim of the Basel III accord is to minimize and preferably eliminate the risk of global financial turmoil’s in the future. The accord is emphasising the importance of increasing the capitalization of banks and their liquidity. In this chapter we analyse its likely impact on banking efficiency. The analysis is based on a fictitious bank, which is operating at the very edge of the Basel II regulatory capital requirement and gradually adapts to the new regulatory framework. This analysis demonstrates that the new liquidity and capital adequacy requirements of Basel III are likely to have substantial effects on both the returns and risk exposures of banks. The higher liquidity requirement will not only lower the bank’s liquidity risk, which will lead to less interest revenue, but the bank will also lower its interest rate risk exposure. The sharpened capital adequacy requirements will on one hand result in lower return on equity. On the other hand, the return on assets will increase due to a lower proportion of debt in the bank’s funding. The analysis also implies that Basle III will cause a large price effect if market competition is too weak to make banks price-takers. Hence, a bank’s customers will have to pay higher prices for loans of the same risk class and/or get paid lower interest rates on their savings and deposits.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Företagsekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Business Administration (hsv//eng)

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

Keyword

Banking

regulation

efficiency

Basel Accords

Publication and Content Type

ref (subject category)

kap (subject category)