Basel III: Rethinking Liquidity and Leverage

Abstract

In my study I focus on important topics of the new banking regulation Basel III: leverage and liquidity. Using linear regression I analysed banks’ long term liquidity and leverage ratios and profitability in 12 emerging market, new member, countries and in 15 developed, old member, countries of the EU between 2008 and 2010. I point out that in EU12 there is negative relationship between profit and interbank market dependence in 2010, while positive correlation between profit and funding base stability ratio. In the case of EU15 there is a negative correlation between solvency and profitability in 2008, while the relationship is positive between capital quality – more Tier 1 capital – and profitability.

Furthermore, I have tested the Myers-Majluf theory with monthly aggregated equity issue and the Dow Jones financial institutions index changes relating to the eurozone between 1990 and 2011. According to this theory, equity issue leads to lower equity prices. I point out that on an aggregated level (eurozone) the theory cannot be proved. Myers-Majluf theory is particularly important in the process of banking recapitalisation, since it is this theory that dictates slower banking capitalisation. From the perspective of a macroprudential policy capital increase would be more beneficial than asset decrease.

Key words:

• Basel III
• Liquidity
• Leverage

JEL classification::

• G21