THE MARKET'S REACTION TO THE BASEL IV ANNOUNCEMENT

Abstract

Stricter capital requirement for banks is one of the key measures to make the banking system more resilient and eventually counteract financial crises. Established by the Basel Committee on Banking Supervision (BCBS) since 1988, the Basel Accords are a series of regulatory acts of bank capital requirements. These accords, which require banks to keep a certain level and quality of capital, have become both recognized and criticized. However, BCBS continues to increase requirements on capital. In 2016 and 2017, the strictest version of the accords were announced through the establishment of Basel IV. While investigating the market movements triggered by Basel IV, this study examines the void of how stricter capital requirements impact banking performance with an event study methodology. The findings demonstrate a minor negative effect on banking performance during the announcement of Basel IV. However, the results do not yield any statistical significance, a result that could very well be an indication of the opaqueness of the capital requirement or simply because the market did already internalize the effects of Basel IV before the announcement.