Prague Economic Papers 2014, 23(2):143-161 | DOI: 10.18267/j.pep.477

The Level of Capital and the Value of EU Banks under Basel III

Barbora ©útorová1, Petr Teplý2
1 Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague (IES FSS UK), Opletalova 26, 110 00 Prague 1 (barbora.sutorova@gmail.com).
2 IES FSS UK & Faculty of Finance and Accounting, University of Economics, Prague, nám. W. Churchilla 4, 130 67 Prague 3 (petr.teply@vse.cz).

The 2007-2009 global financial turmoil was exacerbated by a low level of financial market regulatory coordination. Historical experience has shown that despite implementing regulations, supervision and macroeconomic policies, the financial industry regularly experiences crises. Consequently, a similar impact might be expected from the Basel III new bank regulatory framework. The aim of this paper is two-fold; in the first part dedicated to theory we describe the Basel III regulatory standards and argue that this regulation is not sufficient and will not prevent financial markets from experiencing future crises. Moreover, we discuss implementation of new banking regulation in Europe: the Capital Requirements Directive IV and stricter capital requirements for European banks set by the European Banking Authority in 2011. In the second part, we focus on an empirical analysis of the impact of stricter capital requirements as defined in the Basel III framework on the market value of European banks. Our analysis employs the fixed effects methodology on the financial data collected from 172 banks listed on European stock exchanges during the 2005-2011 period. We conclude that the impact of the Basel III regulation on the value of bank shares will probably be perceived negatively by the market, which could be reflected in a drop in the market value of the observed banks.

Keywords: regulation, bank, Basel III, capital, fixed effects methodology, market value
JEL classification: G18, G21, G32

Published: January 1, 2014  Show citation

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©útorová, B., & Teplý, P. (2014). The Level of Capital and the Value of EU Banks under Basel III. Prague Economic Papers, 23(2), 143-161. doi: 10.18267/j.pep.477
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