Incentive

Capital (architecture)

Financial system

Financial capital

Basel I

Basel II

Accounting

Archaeology

Economics

Market economy

Business

Capital adequacy ratio

Risk-weighted asset

Capital requirement

Operational risk

Risk management

Human capital

Capital formation

Basel III

Finance

Risk-adjusted return on capital

History

The Quarterly Review of Economics and Finance

This study examines whether the capital requirements under Basel III are effective in enhancing the profitability and efficiency of the banking sector.Drawing on a sample of the largest commercial banks from the UK and Australia over the period from 2000 to 2019, we employ the FMOLS (Fully Modified OLS) and DOLS (Dynamics OLS) estimation approaches.The results indicate that stricter capital ratio increases operating earnings, whist it fails to improve bank profitability and bank efficiency.Our findings cast doubts on the effectiveness of tax policy in the observed banks.Further empirical testing shows an optimal capital structure in which the banks can achieve the best performance.Interestingly, these optimal ratios are broadly in line with the minimum common equity ratio required under Basel-III.The macroeconomic outlook also contributes to the performance of British and Australian banks.British banks are found to perform well under inflationary pressure and higher policy rates, contrary to the Australian banks whose performance deteriorates.Our results hold across different samples, efficiency, and profitability measures and various estimation models.

Capital requirements and banks performance under Basel-III: A comparative analysis of Australian and British banks