The impact of basel II regulation in the european banking market - A panel data analysis approach

Abstract

This thesis aims to investigate if the improved capital regulatory framework implemented by the Basel Committee on Banking Supervision has had any effect on the capital adequacy ratio of selected banks. A sample of twenty-four European banks was chosen to represent the European banking market as a whole, and a panel data approach was used. To evaluate if any difference occurred between the time period before and after the implementation, a multiple regression analysis using Ordinary Least Squares and Fixed Effects was carried out. Capital adequacy ratio was set as the dependent variable, and Equity ratio, Net loans over total assets, Return on assets, Liquid assets over total deposits and Non‐performing loan ratio as independent variables. A dummy variable was added to each independent variable to distinguish the ratios before the implementation with those from the period after. Further, a bank‐dummy variable for each bank was also added to the model in order to count for bank‐specific differences and to not let these bias the result. The Robust FE result showed that five independent variables had a significant effect on the capital adequacy ratio, and that the effect has changed since the implementation of Basel II. It also showed that the mean value of the capital adequacy ratio has increased by approximately two percent. The model proved that Basel II has had a statistically significant effect, but in reality this effect was quite unpretentious related to how big and expensive the implementation process has been. We consider our regression reliable on the basis of an accurate selection of the econometric methods used and a significant result, even though the effect of Basel II turned out to be minor compared to what we expected it to be.