The Impact of the Capital Regulations on Banking Risk and Banking Performance : Empirical Evidence from the OECD and the MENA Countries

Al Balushi, Yousuf Mohamed Zahran

Abstract

The banking regulations have been developed over the last decades as reflected in the amendments of the Basel Accords Framework that is the most voluntary adopted international banking regulations. The new amendments have paid more attention to the banking capital framework as one of the major approaches to strengthen the stability of the banking system. Bankers have been pressurised to either increase regulatory capital or shrink investment in risky assets over the last decade. Yet, the recent wave of bank failures or restructurings indicates that previous regulations had not produced the desired results. Do the new capital regulations produce satisfying outcomes in terms of influencing the banking risk behaviour and improve banking performance level? This research aims to contribute to the Banking Capital, Risk Management, and Banking Performance literature by providing empirical evidence on the consequences of banking capital regulations on banking risk behaviour and banking performance using the most recent dataset (2003 to 2014). The research presents the experience of banks from financially developed markets, which are represented by banks from countries that are members of the Organisation for Economic Co-operation and Development (OECD), and banks from less-developed markets, which are represented by banks from the Middle East and North Africa countries (MENA), over a sample period that covers the transformation period before and after the implementation of the Basel Accords II, the Basel Accords II.5, and the Basel Accords III respectively. The analysis in this research uses a panel-based random effects model with error terms clustered at the firm level to accounts for the heterogeneity effects that derive from different ownership nature, regulatory pressure period, and economic and financial development level of countries.
The empirical results of this research show that capital level could impact banking risk-level. However, this impact does not necessarily imply that high-capital banks are associated with less risk. Besides, not all undercapitalised banks are found to be associated with less risk during the post period of new reforms in the capital regulations. From the perspective of banking performance, the results show that the capital level influences the banking performance. The results show that this capital-performance nexus varies according to the capitalisation level. Undercapitalised banks are found to be associated with high earnings and low costs, while better-capitalised banks found to be associated with low earnings and high costs. Besides, the results of this research emphasise the importance of considering other heterogeneity factors to assess the impact of the capital and its regulations. The results show that ownership profile, capitalisation levels, and the level of economic and financial developments in a country are important factors to understand the capital and risk nexus as well as the capital and performance nexus.

Citation

Al Balushi, Y. M. Z. (2018). The Impact of the Capital Regulations on Banking Risk and Banking Performance : Empirical Evidence from the OECD and the MENA Countries. (Thesis). University of Hull. Retrieved from https://hull-repository.worktribe.com/output/4677595

• Thesis Type: Thesis
• Deposit Date: May 30, 2024
• Publicly Available Date: May 30, 2024
• Keywords: Finance; Banking capital regulations; Risk behaviour; Banking performance
• Public URL: https://hull-repository.worktribe.com/output/4677595
• Additional Information: Business School; University of Hull
• Award Date: Oct 1, 2018