Abstract
The paper seeks to identify strategies of commercial banks in response to higher capital requirements of Basel III reform and its phase-in. It focuses on a sample of nine EU emerging market countries and picks up 5 largest banks in each country assessing their response. The paper finds that all banking sectors raised CAR ratios mainly through retained earnings. In countries where the banking sector struggled with profitability, banks have resorted to issuance of new equity or shrunk the size of their balance sheets to meet the higher capital-adequacy requirements. Worries echoed at the early stage of Basel III compilation, namely that commercial banks would shrink their balance sheet by reducing their lending to meet stricter capital requirements, did materialize only in banks struggling with profitability.
Highlights
Basel III regulatory reform has been relying on higher capital quality and higher capital ratios as one of the key prudential tool
The banks selected for Bulgaria and Poland hold less but close to 50 percent of total bank assets and they represent the bulk of the banking sector
The threat that banks would notably reduce their lending in response to higher capital requirements does not seem to have materialized in Emerging Europe
Summary
Basel III regulatory reform has been relying on higher capital quality and higher capital ratios as one of the key prudential tool. The concerns have stemmed from a possibility that banks would meet the increased capital-adequacy requirements either by widening spreads between lending and deposit rates in order to boost net income or by reducing assets and loans. Both strategies could result in a credit slowdown, with adverse effects on real economic activity. Banks can cope with higher capital-adequacy requirements in multiple ways and the structure of adjustment matters for the macroeconomic costs In this regard, it is worth inspecting commercial banks’ strategies for meeting the higher Basel-III capital requirements. The paper assesses strategies used by banks to meet new regulatory requirement It does not evaluate macroeconomic costs given the challenges. We assess the capital accumulation of banks in emerging market economies in the fourth section
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