The Impact of Basel III on Bank Profitability in the EU: A Study of Bank Size Differences

Abstract

The global financial crisis in 2007-2008 highlighted significant weaknesses in banking regulation and triggered the development of Basel III, a comprehensive framework aimed at enhancing financial stability through regulations such as capital and liquidity standards. While its stabilizing objectives are clear, the implications of Basel III on bank profitability, particularly across different bank sizes, remain debated. This thesis investigates the impact of Basel III on the profitability of banks in the European Union from 2010 to 2023, with a specific focus on differences between large and small institutions. Using panel data from 500 EU banks, the study applies a fixed effects (FE) regression and a Difference-in-Differences (DiD) approach to assess how regulatory changes have influenced return on assets (ROA) while controlling for macroeconomic and bank specific variables. The results indicate that Basel III has had a positive effect on overall bank profitability. However, the profitability effects were more significant for smaller banks compared to larger institutions.