Risk-based regulation and supervision of second-tier banks: experience of EU countries
Abstract
The aim of the study was to determine the impact of increased capital adequacy standards of second-tier banks on their performance. The study is based on second-tier banks of EU member states, as these countries are the first to implement the Basel Committee recommendations, so their experience should be studied and taken into account when building risk-based regulation of second-tier banks of Ukraine and Kazakhstan. The study covers the period of 2009–2022, as the Basel III regulations were adopted after 2008, and they began to operate for the second-tier banks of EU member states in 2013. The study was conducted using econometric modelling with an analysis of the dependence of banking indicators on the capital structure established by Basel III. Functional interrelationships of the dependence of Net Interest Income, Profit, Return on Assets, Return on Equity, Risk Costs to Operating Income were tested. The impact of capital adequacy requirements on the performance of second-tier banks was determined: capital adequacy requirements have a positive impact on net interest income and profit of second-tier banks. The obtained results can be used to substantiate increasing capital adequacy requirements to increase the reliability of the banking system as an element in the system of factors of economic growth of the national economy.
Keyword : bank capital, risk-based regulation, banking system, second-tier banks, Basel III
How to Cite
Alina, G., Zhurakhovska, L., Dugalova, G., Utegenova, Z., Omarova, B., & Murzatayev, Y. (2024). Risk-based regulation and supervision of second-tier banks: experience of EU countries. Business: Theory and Practice, 25(2), 548–562. https://doi.org/10.3846/btp.2024.19604
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Artemenko, D., & Bychkova, I. (2020). Legal framework for risk-based banking supervision in the digital age. Financial Law Review, 19(3), 81–102. https://doi.org/10.4467/22996834FLR.20.016.12751
Basel Committee on Banking Supervision. (2010). An assessment of the long-term impact of stronger capital and liquidity requirements (BCBS Report No. 173). Bank for International Settlements. https://www.fsb.org/wp-content/uploads/r_100818a.pdf
Beck, T., & Rojas-Suarez, L. (2019). Making Basel III work for emerging markets and developing economies (A CGD Task Force Report). Center for Global Development. https://doi.org/10.2139/ssrn.3391886
Bitar, M., Pukthuanthong, K., & Walker, T. (2018). The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of International Financial Markets, Institutions and Money, 53, 227–262. https://doi.org/10.1016/j.intfin.2017.12.002
Buzaubayeva, P. N., & Makysh, S. B. (2022). Analysis of the current state supervision of second-tier banks in the Republic of Kazakhstan. ECONOMIC Series of the Bulletin of the L. N. Gumilyov ENU, 3, 174–186. https://doi.org/10.32523/2789-4320-2022-3-174-186
Callens, E. (2023). Third country CCP supervision as a catalyst for more centralised EU CCP supervision? Journal of Corporate Law Studies, 23(1), 197–229. https://doi.org/10.2139/ssrn.4349597
Cevikcan, G., & Tas, O. (2022). Risk-oriented efficiency assessment within the level of capitalisation for financial institutions: Evidence from Turkish securities firms. International Journal of Financial Studies, 10(4), Article 110. https://doi.org/10.3390/ijfs10040110
Dang, V. D. (2021). The Basel III Net stable funding ratio and a risk-return trade-off: Bank-level evidence from Vietnam. Asian Academy of Management Journal of Accounting and Finance, 17(2), 247–274. https://doi.org/10.21315/aamjaf2021.17.2.10
Demir, B., Michalski, T. K., & Ors, E. (2017). Risk-based capital requirements for banks and international trade. The Review of Financial Studies, 30(11), 3970–4002. https://doi.org/10.1093/rfs/hhx062
Durango‐Gutiérrez, M. P., Lara‐Rubio, J., & Navarro‐Galera, A. (2023). Analysis of default risk in microfinance institutions under the Basel III framework. International Journal of Finance & Economics, 28(2), 1261–1278. https://doi.org/10.1002/ijfe.2475
European Central Bank. (2022). Statistical data warehouse. ECB.
European Council. (2021). Banking union. https://www.consilium.europa.eu/en/policies/banking-union/
Fidrmuc, J., & Lind, R. (2020). Macroeconomic impact of Basel III: Evidence from a meta-analysis. Journal of Banking & Finance, 112, Article 105359. https://doi.org/10.1016/j.jbankfin.2018.05.017
Haque, F. (2019). Ownership, regulation and bank risk-taking: Evidence from the Middle East and North Africa (MENA) region. Corporate Governance, 19(1), 23–43. https://doi.org/10.1108/CG-07-2017-0135
Hasan, I., Hassan, G., Kim, S.-J., & Wu, E. (2021). The impact of risk-based capital rules for international lending on income inequality: Global evidence. Economic Modelling, 98, 136–153. https://doi.org/10.1016/j.econmod.2021.01.003
Hogan, T. L. (2020). A review of the regulatory impact analysis of risk-based capital regulations. In AIER Sound Money Project (Working Paper No. 2020-17). SSRN. https://doi.org/10.2139/ssrn.3692783
Hogan, T. L., Meredith, N. R., & Pan, X. (2018). Evaluating risk-based capital regulation. Review of Financial Economics, 36(2), 83–96. https://doi.org/10.1016/j.rfe.2017.10.003
Holod, D., Kitsul, Y., & Torna, G. (2020). Market risk-based capital requirements, trading activity, and bank risk. Journal of Banking & Finance, 112, Article 105202. https://doi.org/10.1016/j.jbankfin.2017.08.019
Khiaonarong, T., Das, B., Zhang, C., Gersl, A., Goh, T., Lohmus, P., Newbury, L., & Wilson, C. (2023). Financial sector stability review (IMF Country Report No. 23/344). International Monetary Fund. https://www.elibrary.imf.org/view/journals/002/2023/344/article-A000-en.xml
Kulyniak, I., Ohinok, S., & Rachynska, H. (2021). Scientific and methodological approach to assessing the level of banks’ financial security. In S. Babichev, V. Lytvynenko, W. Wojcik, & S. Vyshemyrskaya, Lecture Notes in Computational Intelligence and Decision Making. ISDMCI 2020. Advances in Intelligent Systems and Computing (Vol. 1246). Springer. https://doi.org/10.1007/978-3-030-54215-3_6
Li, T., Trinh, V. Q., & Elnahass, M. (2023). Drivers of global banking stability in times of crisis: The role of corporate social responsibility. British Journal of Management, 34(2), 595–622. https://doi.org/10.1111/1467-8551.12631
Mashamba, T. (2018). The effects of Basel III liquidity regulations on banks’ profitability. Journal of Governance and Regulation, 7(2), 34–48. https://doi.org/10.22495/jgr_v7_i2_p4
Mérő, K. (2021). The ascent and descent of banks’ risk-based capital regulation. Journal of Banking Regulation, 22, 308–318. https://doi.org/10.1057/s41261-021-00149-1
Munawaroh, D., & Azwari, P. C. (2019). Effect of risk based bank rating on financial performance of Sharia commercial banks. Akuntabilitas: Jurnal Ilmu Akuntansi, 12(2), 201–214. https://doi.org/10.15408/akt.v12i2.13189
Mundt, C. (2017). Effects of the basel III liquidity risk metrics on U.S. bank performance and stability [Doctoral Dissertation, Sacred Heart University, Jack Welch College of Business]. Fairfield, CT.
Navas, J., Dhanavanthan, P., & Lazar, D. (2021). Is risk based capital ratio a true measure of the soundness of banks? Evidence from India. International Journal of Financial Research, 12(3), 92–102. https://doi.org/10.5430/ijfr.v12n3p92
Pervez, A., Mansour, N., & Bansal, R. (2022). A study on the implementation of international banking standards by BCBS with special reference to Basel III norms in emerging economies: Review of empirical literature. In B. Alareeni & A. Hamdan (Eds.), Artificial intelligence and COVID effect on accounting. Accounting, finance, sustainability, governance & fraud: Theory and application (pp. 139–156). Springer. https://doi.org/10.1007/978-981-19-1036-4_10
Pham, H. L., & Daly, K. J. (2020). The Impact of BASEL accords on the management of Vietnamese commercial banks. Journal of Risk and Financial Management, 13(10), Article 228. https://doi.org/10.3390/jrfm13100228
Rohovska-Ishchuk, I. (2022). Strengthening the role of gold as a reserve asset of central banks in conditions of uncertainty in world markets. Věda a Perspektivy, 4(11), 20–32. https://doi.org/10.52058/2695-1592-2022-4(11)-20-32
Roulet, C. (2018). Basel III: Effects of capital and liquidity regulations on European bank lending. Journal of Economics and Business, 95, 26–46. https://doi.org/10.1016/j.jeconbus.2017.10.001
Sistiyarini, E., & Supriyono, S. E. (2017). The application of risk based bank rating on bankruptcy prediction of banks in Indonesia. Jurnal Keuangan dan Perbankan, 21(2), 302–311. https://doi.org/10.26905/jkdp.v21i2.564
Sjahrifa, C., Daryanto, W. M., & Ananggadipa, W. K. (2018). Measuring the financial performance of Indonesian banking industry using risk-based bank rating. International Journal of Business Studies (IJBS), 2(1). https://doi.org/10.32924/ijbs.v2i1.31
Su, S.-H., Lee, H.-L., Chou, J.-J., & Chen, H. (2020). Effects of risk based bank rating on profit growth of rural bank: An empirical study in Indonesia. International Journal of Business Management and Economic Review, 3(2), 137–150. https://doi.org/10.35409/IJBMER.2020.3173
Taskinsoy, J. (2018). Effects of Basel III higher capital and liquidity requirements on banking sectors across the main south East Asian Nations. International Journal of Scientific & Engineering Research, 9(4), 214–237. https://doi.org/10.2139/ssrn.3275003
Trinh, V. Q., Cao, N. D., Li, T., & Elnahass, M. (2023). Social capital, trust, and bank tail risk: The value of ESG rating and the effects of crisis shocks. Journal of International Financial Markets, Institutions and Money, 83, Article 101740. https://doi.org/10.1016/j.intfin.2023.101740
van der Cruijsen, C., de Haan, J., & Roerink, R. (2023). Trust in financial institutions: A survey. Journal of Economic Surveys, 37(4), 1214–1254. https://doi.org/10.1111/joes.12468