BASEL III: The effect that Capital requirements have on interest rate margins
(2013) NEKH01 20131Department of Economics
- Abstract (Swedish)
- The Basel III regulatory framework was created in direct response to the financial crisis that occurred in 2007-2008. The regulatory framework in place during and before the crisis, Basel II, had not done enough to prevent the crisis. This prompted a revision and expansion of the regulations. The regulators created a new framework, which was initiated in January of 2013 and is expected to be fully implemented by 2019. Basel III expands the capital requirements already in place in Basel II. These increases in capital requirements will have an effect on the profitability of the banks. According to the Modigliani-Miller (MM) theory, increases in equity will reduce the banks’ return on equity (ROE). If the ROE of the banks are falling, the... (More)
- The Basel III regulatory framework was created in direct response to the financial crisis that occurred in 2007-2008. The regulatory framework in place during and before the crisis, Basel II, had not done enough to prevent the crisis. This prompted a revision and expansion of the regulations. The regulators created a new framework, which was initiated in January of 2013 and is expected to be fully implemented by 2019. Basel III expands the capital requirements already in place in Basel II. These increases in capital requirements will have an effect on the profitability of the banks. According to the Modigliani-Miller (MM) theory, increases in equity will reduce the banks’ return on equity (ROE). If the ROE of the banks are falling, the increase in capital requirement will not have large effects on the lending margins, but there will be an increase in tax expenditure for the bank. There is, however, some distortion to the MM theory, as the implicit guarantees provided by the government will cause the banks to try to maintain their ROE.
This study used the method of King (2010) to create a model bank, using the annual reports of 2011-2012 for the 4 major Swedish banks. Using this model bank, a simulation on how a 1pp increase in total capital requirements will impact ROE. The objective is to identify by how much the banks need to increase their lending spread in order to maintain their pre capital requirement ratio ROE. This study concludes that an increase in the lending spread by 7 basis points is needed to maintain the ROE when the banks increase their total capital ratio by 1pp. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4024833
- author
- Eriksson, Alexander LU
- supervisor
- organization
- course
- NEKH01 20131
- year
- 2013
- type
- M2 - Bachelor Degree
- subject
- keywords
- Basel III, Financial regulations, Interest margins, Sweden
- language
- English
- id
- 4024833
- date added to LUP
- 2013-09-17 14:37:39
- date last changed
- 2013-09-17 14:37:39
@misc{4024833, abstract = {{The Basel III regulatory framework was created in direct response to the financial crisis that occurred in 2007-2008. The regulatory framework in place during and before the crisis, Basel II, had not done enough to prevent the crisis. This prompted a revision and expansion of the regulations. The regulators created a new framework, which was initiated in January of 2013 and is expected to be fully implemented by 2019. Basel III expands the capital requirements already in place in Basel II. These increases in capital requirements will have an effect on the profitability of the banks. According to the Modigliani-Miller (MM) theory, increases in equity will reduce the banks’ return on equity (ROE). If the ROE of the banks are falling, the increase in capital requirement will not have large effects on the lending margins, but there will be an increase in tax expenditure for the bank. There is, however, some distortion to the MM theory, as the implicit guarantees provided by the government will cause the banks to try to maintain their ROE. This study used the method of King (2010) to create a model bank, using the annual reports of 2011-2012 for the 4 major Swedish banks. Using this model bank, a simulation on how a 1pp increase in total capital requirements will impact ROE. The objective is to identify by how much the banks need to increase their lending spread in order to maintain their pre capital requirement ratio ROE. This study concludes that an increase in the lending spread by 7 basis points is needed to maintain the ROE when the banks increase their total capital ratio by 1pp.}}, author = {{Eriksson, Alexander}}, language = {{eng}}, note = {{Student Paper}}, title = {{BASEL III: The effect that Capital requirements have on interest rate margins}}, year = {{2013}}, }