Modelling the Impact of New Capital Regulations on Bank Profitability

Vighneswara Swamy

MPRA Paper from University Library of Munich, Germany

Abstract: This study models the impact of new capital regulations proposed under Basel III on bank profitability by constructing a stylized representative bank’s financial statements. We show that the higher cost associated with a one-percentage increase in the capital ratio can be recovered by increasing lending spreads. The results indicate that in the case of scheduled commercial banks, one-percentage point increase in capital ratio can be recovered by increasing the bank lending spread by 31 basis points and would go upto an extent of 100 basis points for six-percentage point increase assuming that the risk weighted assets are unchanged. We also provide the estimations for the scenarios of changes in risk weighted assets, changes in return on equity (ROE) and the cost of debt.

Keywords: Banks; Regulation; Basel III; Capital; Interest Income (search for similar items in EconPapers)
JEL-codes: E44 E51 E61 G21 G28 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Modelling the Impact of New Capital Regulations on Bank Profitability (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:58323

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