Basel III: Rethinking liquidity and leverage

In: Society and economy: journal of the Corvinus University of Budapest, Band 37, Heft 1, S. 89-107

Abstract

The paper focuses on important topics of the new banking regulation Basel III: leverage and liquidity. Using linear regression, I analysed the long term liquidity, leverage ratios and profitability of banks in the 12 emerging market new EU members and developed, old member countries between 2008 and 2010. I point out that in the EU12 there was a negative relationship between profits and interbank market dependence in 2010, while positive correlation existed between profits and funding base stability ratio. In the case of EU15 there was a negative correlation between solvency and profitability in 2008, while the relationship is positive between capital quality (more tier 1 capital) and profitability. Furthermore, I have tested the Myers-Majluf theory with monthly aggregated equity issue and the Dow Jones financial institutions index changes relating to the eurozone between 1990 and 2011. According to this theory, equity issue leads to lower equity prices. I point out that on an aggregated level (the eurozone) the theory cannot be proved. The Myers-Majluf theory is particularly important in the process of banking recapitalisation, since it dictates slower banking capitalisation. From the perspective of a macroprudential policy, capital increase would be more beneficial than asset decrease.