Impact of the Basel III Capital Reforms on Bank Funding Costs: Australian Evidence

38 Pages Posted: 15 Dec 2016 Last revised: 18 Apr 2019

See all articles by Linh Nguyen

Linh Nguyen

Centre for International Finance and Regulation (CIFR); Macquarie University

James R. Cummings

University of Sydney; Centre for International Finance and Regulation (CIFR)

Date Written: March 29, 2019

Abstract

The Basel III reform package has sought to address lessons from the financial crisis of 2007-2009, by imposing additional equity capital requirements on banks. We examine the long-run cost implications of the reforms for banks that have transitioned to the new requirements, in an economy with a strong dependence on bank lending and a highly concentrated banking industry. We find evidence that the risk premium on bank equity increases with financial leverage, as predicted by the Modigliani-Miller theorem. This effect is weaker than reported by studies in countries with less concentrated banking industries, including the United Kingdom and Switzerland. However, we also find evidence that the risk premium on bank equity became more responsive to changes in leverage after the financial crisis. We estimate that the reforms have resulted in a modest increase in banks’ overall funding costs (of about 10-17 basis points annually).

Keywords: Commercial banks, Bank regulation, Bank capital requirements, Bank funding costs

JEL Classification: G21, G28

Suggested Citation

Nguyen, Linh and Cummings, James R., Impact of the Basel III Capital Reforms on Bank Funding Costs: Australian Evidence (March 29, 2019). CIFR Paper No. 132/2016/Project T023; 31st Australasian Finance and Banking Conference 2018; Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2885050 or http://dx.doi.org/10.2139/ssrn.2885050

Linh Nguyen (Contact Author)

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

James R. Cummings

University of Sydney ( email )

Room 420 Codrington Building H69
University of Sydney, NSW 2006
Australia

HOME PAGE: http://www.sydney.edu.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
247
Abstract Views
964
rank
128,917
PlumX Metrics