Researchers

Paul Zechmeister

Andrew MacInnes

Faculty Advisor

Dr. Ionut Florescu

Summary

This research examines the impact of Basel III regulations on U.S. banking institutions, focusing on bank performance, loan availability, and financial stability. By analyzing quarterly financial data from 1991 to 2024, the study investigates whether heightened capital requirements influence profitability and lending capacity.

Using multiple linear regression, Difference-in-Differences (DiD), ANOVA, ANCOVA, and Principal Component Analysis (PCA), the study finds that while higher capital ratios are negatively correlated with bank profitability, the overall effect of post-Basel III regulatory changes on bank profits and loan availability remains inconclusive.

Key Findings

  • Higher capital requirements negatively affect profitability, supporting the hypothesis that stricter regulations reduce operational efficiency.
  • Loan growth slowed post-2014, particularly for medium-sized banks, suggesting that Basel III’s liquidity requirements may have constrained credit availability.
  • Large banks were less impacted by the new regulations, as they had already adjusted capital levels before Basel III implementation.
  • Small banks, despite lower regulatory burdens, exhibited higher profitability but greater sensitivity to economic shocks due to weaker capital buffers.

Future Implications

The findings highlight the trade-off between financial stability and credit availability, emphasizing the need for a balanced regulatory approach. Future research should explore:

  • Long-term Basel III impacts under different regulatory environments.
  • Comparative studies across regions with varying Basel III policies (e.g., U.S. vs. Europe).
  • The Basel III Endgame reforms, which could disproportionately impact large banks by further tightening leverage requirements.

This study contributes to ongoing policy discussions on how to design effective banking regulations that ensure both financial stability and economic growth.