Abstract
This study used a balanced panel data set of USA well, adequately, under, significantly under and critically undercapitalized large commercial banks in pre, during and post-crisis period to investigate the effect of the capital buffer, tier one capital buffer and common equity buffer on risk and net interest margin. The Generalized Method of Moment (GMM) two-step estimation was applied. The conclusions showed that the capital buffer, common equity buffer, tier one capital buffer and total risk are negatively correlated. The findings of period dummies and subgroups dummies showed that capital buffer is influencing the total risk and net interest margin differently in pre, during and post-crisis. The results indicated that the interest margin is lower in pre-crisis and during crisis period than in the post-crisis period, which signifies the impact of capital restrictions imposed by regulators in Basel-III. The outcomes showed that the influence of capital buffer on the net interest margin is not similar in all the subgroups. In addition, the results indicated that there is a positive relationship between bank risk and net interest margin. The findings also displayed that the lagged risk and current risk are positively related.
Highlights
The world financial system has undergone a significant transformation during the last three decades
The results show that the total risk and the net interest margin have average values of .723 and .033 respectively
The findings show that a one percent increase in the capital buffer in the post-crisis period leads to 0.258 percent increase in net interest margin whereas the positive rate of change was 0.2438, 0.2292 during and pre-crisis period, respectively
Summary
The world financial system has undergone a significant transformation during the last three decades. The globalization has increased competition in banking sectors of the developed, developing and emerging economies around the world. This globalization and technological transformation have encouraged financial institutions to develop new innovative financial products to fulfill the current requirements. The financial crisis 2007-2008 showed that the higher ratio of capital, imposed by Basel II, was inadequate to avoid banks failure. These inadequacies of Basel II motivated the regulators to develop new and more appropriate guidelines to fill this gap in the banking system. The Basel Committee on Banking and Supervision (BCBS) provided new guidelines for banking supervision under the title “Basel-III” in 2010, which provides new definitions of bank capital and bank liquidity as core instruments to manage
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