EconPapers    
Economics at your fingertips  
 

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

Gastón Giordana and Ingmar Schumacher ()
Additional contact information
Ingmar Schumacher: IPAG Business School, Paris, 75006, France

Journal of Risk and Financial Management, 2017, vol. 10, issue 2, 1-21

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 banks’ profitability (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 2003q2–2011q3. 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 (approximated 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. We find that the liquidity regulation focusing on maturity mismatches (i.e., NSFR) induces a decrease in average probabilities of default. Conversely, the impact on banks’ profitability is less clear-cut; what seems to matter is banks’ funding structure rather than the characteristics of the portfolio of assets. Additionally, we use a model of bank behavior to simulate the banks’ optimal adjustments of their balance sheets as if they 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 during a crisis episode 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: C E F2 F3 G (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.mdpi.com/1911-8074/10/2/8/pdf (application/pdf)
https://www.mdpi.com/1911-8074/10/2/8/ (text/html)

Related works:
Working Paper: An Empirical Study on the Impact of Basel III Standards on Banks? Default Risk: The Case of Luxembourg (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:10:y:2017:i:2:p:8-:d:95645

Access Statistics for this article

Journal of Risk and Financial Management is currently edited by Prof. Dr. Michael McAleer

More articles in Journal of Risk and Financial Management from MDPI, Open Access Journal
Bibliographic data for series maintained by XML Conversion Team ().

 
Page updated 2019-07-18
Handle: RePEc:gam:jjrfmx:v:10:y:2017:i:2:p:8-:d:95645