The impact of the Basel III Accord on commercial banks’ capital and risk : empirical analysis for the European Union and the United States

The purpose of this thesis is to study the effect of the Basel III Accord on commercial banks’ capital and portfolio risk over the period 2006-2014. European and American commercial banks are compared to analyze potential differences in capital and risk behavior. Building on previous research, we use a modified version of the simultaneous equations model developed by Shrieves and Dahl (1992). The empirical results, obtained through a regression analysis in three steps, show that financial institutions have globally increased their capital adequacy ratio. Undercapitalized European and American banks boosted their capital and dropped their credit risk over the reference period. Moreover, the regression results suggest that Basel III is an effective regulation. Banks under regulatory pressure were induced to increase equity and decrease risk more than financial institutions with adequate capital buffers. Finally, by the inclusion of a year dummy variable in the model, we show that the announcement of the implementation of a capital regulation has an impact on the capital and risk decisions of capital-constrained organizations.