Exploration of the Impact of Basel III on the Performance of Commercial Banks

Abstract

Commercial banks are major actors in the financial industry and the economy as a whole. Due to financial globalization which is simple terms can be defined as the free movement of capital and money, and the advent of the financial crisis of 2008, the world economy suffered financial turmoil. Then there came a need to revise the existing regulation of the sector, in which certain accepted and others looked at it as a route to failure. It is in this light that experts in the field felt that it is important to look at the impact of Basel III at a performance of commercial banks. Simply put, the Basel III is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. The main objective of this paper is to examine the impact of the Basel III principles of (capital requirement, leverage ratio, and liquidity requirements) as indicators for commercial bank performance. This could also be looked through the preferred return rate and risk appetite of shareholders. Their research design used in this study is a mixed method approach by using both qualitative and quantitative method in gathering data. The main data came from secondary sources from the EU countries. Furthermore, data will be presented on tables and a descriptive analysis will be used to conduct their analysis. The results of this research using three scenarios and the findings were as follows: Increase in capital doesn’t necessary result to increase in financing cost. A higher leverage will obtain a higher tax advantage and therefore a lower capital is preferred. The new Basel III capital ratios will prevent over-leveraging and such tax advantage would be reduced, and finally the new requirements do have a significant impact on the net income and credit portfolio allocation.