Banks' reactions to Basel III regulations

Abstract

Background and problem discussion: In the aftermath of the 2008 financial crisis, regulators agreed upon new capital requirements in order to avoid a new crisis and to strengthen the stability within the banking industry. Purpose of study: The main purpose of this thesis is to find out how the stability of banks within Europe have changed due to regulations. Methodology: The thesis will use quantitative methods to gain an understanding of the stability in banks. Financial data from the database Bankscope, which provides data from banks’ annual reports, is collected and analysed. Annual developments are investigated as well as differences between countries. Correlation analysis and regression analysis is performed. Empirical findings and analysis: In general banks have raised their equity ratios and their Tier 1 ratio. There seems to be a positive relationship between equity to total assets and net interest margin. For some periods the NIM-model holds for some countries. Net interest margin seems to be dependent on equity to total assets as well as other variables. This suggests that regulating equity will also affect other variables. Conclusion: The Basel III regulations seem to have the effect of making banks raise their equity ratios, whether this effect also means that banks are more stable is unclear. The differences found between the investigated countries suggests that further studies would be useful to ensure how the regulations are affecting banks in different countries differently, and if banks really are more stable.