The impact of Basel iii capital and liquidity regulations on bank profitability in emerging markets

Abstract

The purpose of the study is to investigate how Basel III's regulation for capital and liquidity impacts the profitability of banks in emerging markets. Using data from 2012 to 2022, the research looks at listed banks in 22 emerging market countries. The study measured bank profitability using two proxies: return on equity and return on assets. The study considered several bank-specific and macroeconomic variables. For bank-specific drivers, this includes capital, liquidity, bank size, cost-effectiveness, and credit quality, while macroeconomic factors include economic growth measured in gross domestic product growth, inflation, and interest rate. Dynamic panel data (system GMM) was employed to examine the relationship between the variables. The results reveal that the Basel requirements have a limited impact on bank profitability. The findings for banks subject to Basel III regulation show a significant and positive impact of capital on bank profitability and no impact of liquidity on bank profitability. For banks under no Basel III regime, the results show a significant and negative impact of liquidity on bank profitability but show no statistical significance and impact of capital on bank profitability. Comparatively, capital positively impacts bank profitability for Basel III banks, while liquidity negatively impacts bank profitability for non-Basel III banks in emerging markets. By conducting an empirical analysis of the effects of capital and liquidity requirements on bank performance for banks in emerging market countries, this study supplements the body of literature. Although the Basel III framework is important for prudential banking, its effects on the performance of emerging market banks are, therefore, varied, and debatable