Wednesday, Feb 8, 2023
International Finance
Banking

Basel III implementation may only be partially effective

Basel III regulatory framework, bank capital, financial system, economy, Zurich, Halle Institute for Economic Research
The Basel III regulatory framework seeks to refine financial system stability for banks

The Basel III regulatory framework, effective as of 1 January 2019, seeks to increase capital requirements for banks in order to improve financial system stability.

New research by Swiss Finance Institute Professor Steven Ongena from the University of Zurich and co-authors Professor Reint Gropp from the Halle Institute for Economic Research and Professor Thomas C. Mosk and Carlo Wix from Goethe University Frankfurt shows that the Basel III reform may be partially effective and may induce banks to reduce their credit exposure to corporate and retail clients.

Zurich, 26 February 2018. Swiss Finance Institute Professor Steven Ongena from the University of Zurich and co-authors: Professor Reint Gropp from the Halle Institute for Economic Research and Professor Thomas C. Mosk and Carlo Wix from Goethe University Frankfurt studied the impact of the 2011 European Banking Authority capital exercise—which unexpectedly required certain banks to increase their regulatory capital ratios—on banks’ balance sheets and the real economy.

Based on this capital exercise, the researchers forecast that the Basel III reform may induce banks to reduce the amount of assets they finance by lowering their credit exposure to corporate and retail clients, but that they will likely not increase their amount of regulatory capital. In this respect, requiring banks to strengthen their regulatory capital instead of the equity ratio might be more effective and thus minimize the negative impact on the real economy.

The full version of the February issue of SFI’s Practitioner Roundups is available at http://sfi.ch/system/tdf/Roundup_Feb18_English_v2.pdf?file=1

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