Basel III and the Transformation of the Banking Model: A Theoretical Analysis of Trade-offs Between Solvency, Liquidity, Funding and Performance (International Journal of Accounting, Finance, Auditing, Management and Economics)

Summary

• The article analyses how risk-weighted capital, leverage, short-term liquidity and stable funding requirements interact to shape bank balance sheets, performance and resilience, without claiming a causal effect.p.2
• The standards finalised in 2017 were deferred to 1 January 2023, and the output floor transition period was extended to 1 January 2028.p.3
• The leverage ratio relates Tier 1 capital to a risk-insensitive exposure measure, with a minimum of 3%.p.8
• The output floor requires internal-model risk-weighted assets to be no lower than 72.5% of those under standardised approaches.p.8
• The NSFR requires available stable funding to be at least 100% of required stable funding at all times.p.9
• The conservation buffer of 2.5% of risk-weighted assets in CET1 raises the top-quality capital requirement to 7% and the total requirement to 10.5%.p.9

Key insights

1. The 2007-2009 crisis showed that compliant capital ratios did not prevent leverage build-up, reliance on short-term funding and liquidity spirals.p.3
2. Capital is a scarce resource, and banks adjusted to capital requirements more by reducing risk-weighted assets than by raising capital.p.8
3. The leverage ratio is a model-independent bound rather than a finer measure of risk.p.8
4. The NSFR does not forbid maturity transformation but limits its intensity, favouring stable retail deposits over short-term wholesale funding.p.9
5. The effect of a Basel III instrument can depend on the other constraints a bank faces, so isolated ratio-by-ratio analysis averages heterogeneous situations.p.18
6. Stable retail deposits become the most sought-after funding source under the liquidity standards.p.13
7. A well-capitalised, deposit-funded bank is expected to be less affected than a bank relying on high leverage and short-term funding.p.14
8. Results from other jurisdictions cannot be transposed without examining institutions and funding structure.p.15