The Impact of Basel III Capital Regulation on Credit Risk: A Hybrid Model

Nadim Alfouhaili, Frédéric Gautier and Iyad Zaarour
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Nadim Alfouhaili: Department of Business, University Paris 1 Pantheon-Sorbonne, Paris, France
Frédéric Gautier: Department of Business, University Paris 1 Pantheon-Sorbonne, Paris, France
Iyad Zaarour: Department of Business, Lebanese University, Beirut, Lebanon

International Journal of Finance & Banking Studies, 2020, vol. 9, issue 2, 56-71

Abstract: This research examined the impact of Basel III capital regulation (BCR) on credit risk (CR) using a sample of 25 commercial banks in Lebanon over the period 2012–2017. BCR is measured using the capital adequacy ratio (CAR) and the common equity tier one ratio (CET1 ratio), CR is measured using net provision for credit losses /total assets. To analyze the data, we constructed a hybrid model based on 3 statistical approaches. First, we modelled the dual impact of BCR and CR using probabilistic inference in the framework of Bayesian Belief Network formalism (BBN). Second, to highlight more about the correlation between BCR and CR, we used Spearman correlation test as a nonparametric approach. Third to study the simultaneous effect of CAR and CET1 ratio on CR weapplied multivariate regression analysis. By analyzing the probabilistic inference for the first approach we concluded that there is an effectof BCR on CR especially for the high level of CET1 ratio, but when we investigated more if this effect is significant using the Spearman correlation test and the multivariate regression analysis, we concluded that there is no effect statistically significant of Basel III capital regulation (BCR) on credit risk (CR). Thefindingsare interesting. In fact,from the regulatory perspective Basel III capital regulation must reduce credit risk. Yet,the results of this article contradict regulators. This allows for further exploration and studies of the coorelation between Basel III and credit risk in MENA banks.

Keywords: Basel III capital regulation (BCR); credit risk (CR); Bayesian belief network (BBN); capital adequacy ratio (CAR); common equity tier 1 ratio (CET1 ratio) (search for similar items in EconPapers)
Date: 2020
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