An Empirical Study on the Impact of Basel III Standards on Banks? Default Risk: The Case of Luxembourg

Gastón Giordana and Ingmar Schumacher

No 79, BCL working papers from Central Bank of Luxembourg

Abstract: We study how the Basel III regulations, namely the Capital-to-assets ratio (CAR), the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR), are likely to impact the banks? profitabilities (i.e. ROA), capital levels and default. We estimate historical series of the new Basel III regulations for a panel of Luxembourgish banks for a period covering 2003q2 to 2011q3. We econometrically investigate whether historical LCR and NSFR components as well as CAR positions are able to explain the variation in a measure of a bank?s default risk (proxied by Z-Score), and how these effects make their way through banks? ROA and CAR. We find that the liquidity regulations induce a decrease in average probabilities of default. Conversely, while we find that the LCR has an insignificant impact on banks? profitability, those banks with higher NSFR (through lower required stable funding, the NSFR denominator) are found to be more profitable. Additionally, we use a model of bank behavior to simulate the banks? optimal adjustments of their balance sheets as if they had had to adhere to the regulations starting in 2003q2. Then we predict, using our preferred econometric model and based on the simulated data, the banks? Z-Score and ROA. The simulation exercise suggests that basically all banks would have seen a decrease in their default risk if they had previously adhered to Basel III.

Keywords: Basel III; bank default; Z-Score; profitability; ROA; GMM estimator; simulation; Luxembourg (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: An Empirical Study on the Impact of Basel III Standards on Banks’ Default Risk: The Case of Luxembourg (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp079

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