Liability Management Exercises of European Banks in Anticipation of Basel III

In the lead-up to the implementation of Basel III, European banks repurchased debt securities that traded below par. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that prudential rules exclude from regulatory capital calculations. The LMEs enabled banks to augment Core Tier 1 capital, given that alternative methods to increase capital ratios were not feasible in practice. Using data of 720 European LMEs conducted between April 2009 and December 2013, we show that poorly capitalized banks repurchased securities and lost about €9.1bn in premiums to compensate their holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern.

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The impact of bank liquidity risk on risk-taking and bank lending: evidence from European bank

Summer - GATR Journal of Finance and Banking Review ◽

10.35609/jfbr.2021.6.2(2) ◽

2021 ◽

Vol 6 (2) ◽

pp. 82-97

Author(s):

Hongyan Liang ◽

Zilong Liu

Keyword(s):

Growth Rate ◽

Risk Taking ◽

Fixed Effects ◽

Liquidity Risk ◽

Bank Lending ◽

Basel Iii ◽

European Banks ◽

Risk Taking Behavior ◽

Loan Growth ◽

The Impact

Objective – This paper uses a sample of annual observations of European banks to examine whether the liquidity risk affects a bank’s risk-taking behavior and its future loan growth. Methodology – A sample of European banks (27 member countries of the European Union plus U.K.) over the period of 2005 to 2019 are used in this study. Liquidity risk is measured by the ratio of liquid assets to total assets. Given the longitudinal nature of the data, the authors use panel regression with bank fixed effects to control for unobserved characteristics that might affect the dependent variable. Findings – The authors find that banks holding more liquid assets take less risk and show a higher subsequent loan growth rate. These results hold for both small and large banks. Novelty – To the authors’ best knowledge, this is one of the earliest studies to carefully examine the effects of liquidity risk on risk-taking behavior and loan growth rate for European banks. Our research suggests that the current Basel III requirement on liquidity ratio can decrease bank’s risking-taking behavior while not necessarily impact their future loan growth. Type of Paper: Empirical JEL Classification: G21, G01, G18. Keywords: Bank Liquidity Risk; Risk-taking Behavior; Loan Growth; Basel III

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Asset-Liability Management in Banking as an Instrument for Minimization of Expenses in the Implementation of Basel III Requirements

SSRN Electronic Journal ◽

10.2139/ssrn.2189606 ◽

2012 ◽

Author(s):

Marina Sakovich

Keyword(s):

Basel Iii ◽

Asset Liability Management ◽

Liability Management

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Systemically Important Banks in Europe: Risk, Complexity and Cross-Jurisdictional Activities

Review of Economic and Business Studies ◽

10.1515/rebs-2019-0088 ◽

2019 ◽

Vol 12 (1) ◽

pp. 163-182

Author(s):

Ana-Ștefania Băluţă ◽

Simona Nistor

Keyword(s):

Financial Institutions ◽

Fixed Effects ◽

Lower Probability ◽

Basel Iii ◽

Probability Of Default ◽

Panel Model ◽

European Banks ◽

Distance To Default ◽

Considerable Impact ◽

Systemically Important Banks

AbstractThis paper aims to investigate the effects of the assets and liabilities structure of financial institutions considered for regulatory purposes on their probability of default, across a sample of European banks that are designated as Global Systemically Important Banks (G-SIBs). Our analysis spans from 1995 to 2018. The empirical findings of a Fixed Effects panel model indicate that characteristics like size, complexity and cross-jurisdictional activities have a considerable impact on banks’ distance to default. This study also finds that financial institutions with greater Capital Tier1 ratios are more likely to have a lower probability of default, a result that highlights the importance of implementing the BASEL III Capital Accord specifications.

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The impact of liquidity risk on bank profitability: some empirical evidence from the European banks following the introduction of Basel III regulations

Journal of Accounting and Management Information Systems ◽

10.24818/jamis.2019.04001 ◽

2019 ◽

Vol 18 (4) ◽

Author(s):

Olga Golubeva ◽

Michel Duljic ◽

Ripsa Keminen

Keyword(s):

Positive Impact ◽

Weighted Least Squares ◽

Research Question ◽

Liquidity Risk ◽

Basel Iii ◽

Data Set ◽

Bank Profitability ◽

Coverage Ratio ◽

European Banks ◽

The Impact

Research Question: The study investigates the impact of liquidity on bank profitability following implementation of the Basel III regulations. Motivation: The theoretical framework of the paper draws upon previous research (Athanasoglou et al., 2008; Arif & Nauman Anees, 2012 and Dietrich et al., 2014) and assumes liquidity ratios to have a varying influence on bank profitability, depending upon a bank's specific and macroeconomic indicators. Idea: This study considers multiple proxies of bank liquidity, including Liquidity Coverage Ratio, a new measure inspired by the Basel III framework, and Loan-to-deposit and Financing gap ratio. Alongside traditionally-applied profitability measures, Earnings before Taxes, Depreciation and Amortisation are assumed to be alternative proxies. Data: In the study, a data set of 45 European banks with 180 observations during 2014-2017 and 37 observations for 2018 has been analysed. Tools: The study proposes a quantitative model based upon Ordinary Least Squires techniques complemented by Weighted Least Squares regressions analysis. Findings: The alternative liquidity risk measures have a significant and positive impact only on some profitability proxies, and an insignificant effect on others. The Basel III liquidity measure, LCR, was an insignificant contributor to all return proxies, which requires further investigation. The results also indicate that an increase in bank size and net provision for loan losses decreases profitability proxies. We also found mixed results concerning the effects of deposits and securities gains and losses on bank profits, and provided possible explanation.

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Basel III: In quest for criteria and scenarios of the banking regulation reform advancement

Voprosy Ekonomiki ◽

10.32609/0042-8736-2016-2-77-93 ◽

2016 ◽

pp. 77-93 ◽

Cited By ~ 1

Author(s):

E. Dzhagityan

Keyword(s):

Financial Regulation ◽

Cost Optimization ◽

Spillover Effect ◽

Regulatory Reform ◽

Banking Regulation ◽

Capital Adequacy ◽

Basel Iii ◽

Eurasian Economic Union ◽

Downward Pressure ◽

Crisis Recovery

The article looks into the spillover effect of the sweeping overhaul of financial regulation, also known as Basel III, for credit institutions. We found that new standards of capital adequacy will inevitably put downward pressure on ROE that in turn will further diminish post-crisis recovery of the banking industry. Under these circumstances, resilience of systemically important banks could be maintained through cost optimization, repricing, and return to homogeneity of their operating models, while application of macroprudential regulation by embedding it into new regulatory paradigm would minimize the effect of risk multiplication at micro level. Based on the research we develop recommendations for financial regulatory reform in Russia and for shaping integrated banking regulation in the Eurasian Economic Union (EAEU).

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