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Dealing with the 2008/2008 Financial Crisis Questioning the Impact of Basel III on the US Economy Abstract

Dealingwith the 2008/2008 Financial Crisis: Questioning the Impact of BaselIII on the US Economy

Abstract

Thisresearch sought to examine the impact of Basel III adoption, focusingon case study of the US financial institutions’ stature. Literatureon the subject is well documented — it spans theoretical, empiricalstudies, quantitative, descriptive, and observational studies,covering various areas. However, they do not adequately the case ofthe US financial institutions. The methodology focused on leverageratio, liquidity ratio, capital and liabilities, as capitalrequirement parameters that delineate the performance of banks. Inthis case, the independent variable is Basel III implementation,while the dependent variable is performance, which measured byvariables leverage ratio, liquidity ratio, capital and liabilities.Thus, this study considers that, by assessing the parameters ofcapital performance, the nature of performance of banks can beunderstood, and potential impact be projected. The findings haveindicated that the implementation of Basel III framework has asignificant impact on the performance of banks and it is largelydetermined by the financial behaviors.

Contents

1. Introduction 4

2.0. Literature review 5

2. Research design and Methodology 8

3. Theory and Hypothesis 12

4. Finding 15

4.1. The Case of Deutsche Bank 15

4.2. The case of BNP Paribas 17

4.3. The case of Barclays bank 19

5. Discussion 21

6. Conclusion and Recommendations 22

  1. Introduction

The2008-2009 financial crises were accompanied by far-reachingconsequences on the global economies, some of which continue to befelt presently. In the attempt to deal with the aftermath andameliorate future occurrences, the G8 countries held a convention toreview capital guidelines, endorsing Basel III framework in 2010Seoul Summit. The Basel III was scheduled to be implemented startingfrom 2013, and to beat the 2015 deadline. However, the deadline forimplementation was later extended and now stands 31 March 2019(Miller, 2014).

Despiteits objectivity, there is a lot of debate on what this could have onthe economies. It has been widely argued that there are various areaspertaining to Basel III that need to be developed and improved to beable to support positive economic development. It is also avowedthat, while the principles of the framework would be embraced, theprocesses of implementation and related challenges would be variedacross economies (IIF, 2011).

Despitethe projected challenges, several institutions across the globe haveembarked on the process of implementing the Basel III requirements.However, the implementation process has only seemed to awaken thequestions on the adversity of the implementation of the framework,with several researches attempting to examine the cases ofinstitutions that have embraced the framework (ACCA, 2011). It hasbeen widely observed that the impacts of Basel III on financialinstitutions have been particularly varied. For instance, Harrison(2011) notes that Some financial institutions have been affectedpositively, while others have been affected negatively. Severaldiscussions have avowed that, since Basel III implementation isaccompanied disruption of the banking processes, forms are alsolikely to be affected as a result. This is because many firms,especially small and medium firms are particularly reliant on thebanking sector for financing (ACCA 2011). According to Harrison(2011), the liquidity provisions underlying the Basel III frameworkare stringent and compromise the capacity of banks to offer long-termfunding to business activities. BCBS (2010) finds that, inparticular, private banks are in the worst position of fulfilling theshort-term liquidity requirements, while banks with relatively smallsizes would have difficult time meeting the LCR requirements,compared to large and medium sized banks. This discussion will beexplored in detail under the literature review section. This paperseeks to examine the impact of Basel III adoption, focusing on casestudy of the US financial institutions’ stature.

2.0.Literature review

Literatureon the projected impact of Basel III implementation on the global andregional economic relations is documented, but it essentiallyprovides different empirical, theoretical and observationalperspectives for conceptualizing the subject.

Forinstance, Repullo and Saurina (2011) assess the countercyclicalbuffers could follow Basel III framework implementation. They focuson the relationship between aggregate credit-to-GDP ratio and theCredit-to-GDP gap trends. They arrive at the results thatcredit-to-GDP gap and the growth of GDP are correlated negativelyfollowing implementation Basel III. They explain that thecredit-to-GDP gaps findings may serve as an indicator that increasingthe financial institutions would lead slow GDP growth. This view issupported by Repullo and Saurina (2011), who express concerns thatthe Basel III framework fails at dampening excess cyclicality ofminimum capital requirements that would hurt global economies, on theoverall. Another study by BCBS (2010) sought to examine the impact ofBasel III, focusing on the impacts on banks. The study sampled 263banks from their 27 member countries and concluded that the BaselIII capital requirements would have profound impact on the banks. Thestudy inferred that upon it full-scale implementation, the commonequity tier ratio for banks holding at least 3 billion Euros (Groups1) would decrease significantly. This change is attributed toincremental adjustments that are deducted to capital. Upon making thedeductions, the Common Equity tier 1 amounts would reduce by assignificant as 40 percent. An examination of the ratios of leveragerevealed that group 1 banks exhibited 2.8 percent average ratio, and42 percent of the banks that participated posted leverage ratio thatfell below the average requirement of 3 percent. The account of thisfollows that Group 1 banks are largely exposed to securitized loansand other forms of securities and their derivatives.

Itis also worth noting that such empirical studies on the potentialeffects of Basel III on banks have also examined the impact ofstringent regulations on the banks, extending their focus on themicroeconomic impacts of banks, such as the changes in the spreads oflending and behaviors of operation. For instance, Barrel et al.(2011) investigated whether tightened regulation imparts a change inthe operation behaviors of firms. The study by involved 713 banks,sampled from the OECD countries. The study established that whenevercapital ratio is increased, banks are compelled to make adjustmentsby avoiding risks, resulting to reduced lending because borrowersfind the conditions prohibitive.

Anotherstudy by Cosimano and Dalia (2011) investigated the issue based on100 large international banks. The study revealed that stringentcapital regulations impact is varied across countries, and is largelydetermined by the credit demand resilience, as well as the increasesin capital, with respect to the changing lending rates. Other recentstudies have also examined the implications of the effect of BaselIII requirements with respect to the loan pricing oriented towardshigh capital requirements. For instance, a study by Elliot (2010)adopts an accounting-oriented analysis on the extent that theinterest charged loans could go up in the cases that United Statesbanks are obligated to accumulate more equities . The calculationsreveal banks would be compelled to increase the spreads of lending byas significant as 39 percent, as a way of maintaining the 15 percentROE, which will impede growth that is traditionally stimulated byloaning.

Literaturehas also considered the implications of tightened regulations in thebanking sector in relation to microeconomic aspects. The studies haveevaluated the trends in the supply of credit towards the privatesector, and the eventual effect on the other sectors. The study byMacroeconomic Assessment Group (2010), for instance, provided anestimate that any increment by 1 percent in the capital ratio in thefour 4 years is accompanied by a change in lending spread of about15bp increment. In addition, this outcome could be accompanied by 14percent reduction in the volumes of lending. The eventuality of thiswould be a fall of global economy by as significant as 0.19 percent.If the Equity capital ratio were to be increased by 1 percent withinan eight-year course, the global GDP would fall by as significant as0.17 percent.

Inthe same vein, according to Sun, Hoon and Wonhong (2012), tightenedcapital requirements could have a significant influence in reducingthe ROE of banks, considering that debts are replaced with equitiesthat are relatively expensive. Banks would seek to raise the rates oflending, as a way of preventing ROE from falling. The estimation ofthe rates of lending was based on the relationship between the incomestatements and the data of the balance sheet. Hanson, Kashyap andStein (2010) conducted a survey across 11 countries from Europe,seeking to investigate the impact of Basel III regulations on Banksand small medium enterprises, especially the implications of theBasel III liquidity framework. The study established that themanagement of liquidity is increasingly becoming a challenging andmandatory, a costly obligation that could hurt bank performance.

Literatureon the implications of Basel III is also descriptive andobservational. For instance, Kashyap, Stein and Hanson (2011)describe the challenges that underlie the adoption of liquid capitalrequirements. According to the author, one of the main challengesthat firms have to deal with is the frequencies of ratiomeasurements. Besides, concerns are also rife that Basel IIIliquidity ratio adoption would trigger a number of changes pertainingto the governance and organization structures of banks and SMEs andliquidity concerns (Hoskin and Woolford, 2011).

Indeed,according to Hoskin and Woolford (2011), the governance of liquidityis largely undefined and firms are paying keen attention to thepolicies of funding, such as costs and availability of funding, andmeasures of operation, such as liquidity ratios and regulatoryratios) at the expense of strategic risk planning, something thatwould lead to adverse financial challenges.

Similarly,Bayoumi and Melander (2008) suggest that Basel III, which isaccompanied by strengthened regulations on banks, could increase theSME sector funding costs. Consequently, this would reduce theavailability of credit, affecting the economy negatively. The casesof tightened regulations are accompanied by reduced bankprofitability, which is orchestrated by the increased funding costs,as well as by the increased investments in assets with low yield.Banks are expected to pass these low yields to the private sectors byincreasing the rates of lending, which would derail the privatesector’s funding environments (Bayoumi and Melander,2008).Therefore, it is intriguing whether such discussions could begeneralized for the case of the United States economy.

  1. Research design and Methodology

Toanalyze the impact of the Basel III on the US financial institutions,this paper seeks to conduct a case study on some of the banks basedin the country and that have already implemented the Basel III.Therefore,the independent variable is Basel III implementation, while thedependent variable is performance, which measured by variablesleverage ratio, liquidity ratio, capital and liabilities. While thereare many financial institutions that have implemented Basel III, onlya case of three banks are considered. Thecase examination approach is cross-sectional method, while dataanalysis is both quantitative and descriptive methodologies. Thebanks that have been selected for case study include the Deutschebank, BNP Paribas and the Barclays Bank. The characteristics of thesebanks are documented as follows.

TheDeutsche bank has most of its operations based in Germany but hasextended operations in the US, and derives its revenue assets frominvestment banking. In the 2012-2013 fiscal year, the companyrecorded improvement performance in wealth creation, assetallocation, corporate banking, international transactions, andsecurity exchange, among other areas. Thefinancial records for the fiscal year 2012-2013 indicate that theconsolidated company revenue were $33.7 and there was improvedperformance in the allocation of assets and creation of wealth,international transactions rose and there was a considerable increasein corporate banking and security exchange among other revenues. Asthe year went by, the bank strengthened its tier 1capital to 11percent in comparison to the previous year’s 11.4 percent and thehope of attaining the targeted tier capital of 8.5 percent seemedachievable. Thecompany had an acid test ratio and current ratio of 0.597 and 0.61respectively. This indicator is a measure to the extent thatbusinesses are able to settle their financial obligations within ashort time. Banks with a liquidity ration that is above the 0.5benchmark are considered to be performing well in the business. Theratio is an indication that the company is adhering to the Base IIIresolution on liquidity, as the company has an assurance rate of 61percent that is able to repay its debts within the stipulated periodof 30 days (Kotz,2015 Barrell, Davis, Fic, Holland, Kirby, and Liadze 2009).

Thereturn on equity (ROE) ratio, which was derived from the bank’sbalance sheet, indicates that the bank had a ratio of 16.76 percent.This ratio determines how efficient the bank can use its capital togenerate more assets. In the same vein, the company had a cash flowratio of 0.678, which is an indication that the company has a 67.8percent of potential in generating more assets, which would be usedto pay off the liabilities in the future. This proportion is higherin comparison to the standard ratio of 0.5 and this means the bank isa good performer. As a way of achieving the Basel III resolution, thebank had to maintain its reserve capital, and this helped the bankacquire more capital that translated to a loss mechanism that helpedthe bank absorb the incurred losses. The bank, therefore, was in aposition to form joint partnership with other corporations, whichenabled the directors to raise more capital whenever there is theneed to raise more capital. Thus, the reserve capital helped the bankissue shares at a discounted rate, while authorized capital would beavailable within two years and it does not transfer risks to theamount of capital issued (Mercille&amp Murphy, 2015).

BNPParibas isan international bank. The company is popular for having reduced itsrisky asset possession. This decision had significantly improved theliquidity of the company, thereby increasing the capacity to lendSMEs, and increasing banks revenue.

Thefinancial records indicate that the bank has a liquidity ratio of0.6, which is an indication that the bank would be able to pay offits liabilities using its available resources within the grace periodof 30 days. This observation implies that the bank would not rely onexternal funding or borrowing to settle its financial obligations todebtors. In the same vein, the computations on the return on equityfor the bank indicated that the bank had ratios of 17.2 percent thismeans that the bank has the capacity to create more assets in thenear future (Mercille &amp Murphy,2015).

Ina bid to acquire to achieve the required Basel III resolution oncapital, BNP bank came up with a strategy of restraining credit, andtherefore imposing constraints to the bank, thereby limiting thebank’s ability to grow their credit giving potential. Thistranslated to downswings as opposed to upswings in the company’sability lending activities. This decision, in turn, helped the bankreduce its potential of incurring further losses in its operations.The bank came up with a plan, which pushed it to adopt the leverageratio that helped in controlling its credit growth that had made thebank to incur huge losses as a result of declining lending that hadtranslated to huge financial losses (Brownand Dehaas, 2012).

BarclaysBank is popular for adopting risky investment strategies, butfollowing the change in management, the company has reconsideredholding risky assets. The bank, in itsbid its bid to reduce high risks, had to restructure its businessoperations so that it would generate more assets and consequentlyincrease its income ratio from 71 percent in the fiscal year 2012 to62 percent in 2013. The cost of business operations and liabilitiesreduced by 5 percent, leading to the bank’s tier ratio to be steadyat 10 percent in the fiscal year 2012-2013. In order to achieve thetargeted capital requirement of the Basel III resolutions, this bankadopted a macro-prudential strategy as a measure in counteringcapital buffers. This strategy was mainly for used to respond to thetime length of the universal risk, as a regulation to the amplitudein managing credit. Basel III permits regulators the option of havingin place a countercyclical funds buffer of 2.5 percent of thefinancial assets owned by the bank at the period of extreme increasein the credit. Using this strategy makes it easier for the managementto evaluate the extent of credit growth, in relation to the Basel IIIresolutions along with other macroeconomics variables that find theirway in the banking sector such as financial ratios (Mercille&amp Murphy, 2015). The bank is in aposition to impose a buffer capital before and during economicupturns, and this translated to restricted growth in the credit andlater the buffer would be removed in the case where there is aneconomic downturn. This move would ensure that the bank was not in aposition deleverage through contracting its credit potential becauseof shortage in capital.

Ofparticular interest would be to relate leverage ratio, liquidityratio, capital, and liabilities, as capital requirement parametersthat delineate whether these banks have been performing any betterfollowing the implementation of the Basel III framework.

  1. Theory and Hypothesis

Thereare many theories on the projected impact of Basel III framework. Forinstance, KPMG (2011) theorizes that banks hence, SMEs would beaffected in different ways upon implementation of Basel III.

Firstis that relatively weak banks would be unable to survive amidst toughfinancial requirements. The adverse economic conditions, accompaniedby stringent regulations, relatively weak banks would find itprohibitive to cope. This scenario would limit their business modelsand make them un-competitive. Second is that Basel III would impart alot of pressure on their profitability ratio. The increase ofrequirements of capital and funding costs and the need to align withthe new regulatory requirements will mount pressure on firmsoperating on limited profit margins (Koller, 2012 Elliott,2010).This issue would result in decreasing investment returns. Thirdis that Basel III would trigger a change in demand of funding, makinglong-term funding to be preferred to short-term funding. This concernfollows that introducing two-liquidity ratio as a remedy forlong-term and short term liquidity and funding nature will discouragefirms from seeking short term funding, causing them to opt forlong-term funding, which has favorable and achievable funding andpricing margins. Forth is that Basel III would stir reorganization oflegal entities. This view is in reference to the fact that theincrease proprietary trading supervisory focus, in correspondencewith financial institution and minority funding, would encourage firmreorganization, which could be characterized by portfolio disposaland mergers and acquisitions, derailing competitiveness. At the sametime, the impact of Basel III on financial systems would includereducing the risks of the systematic crises of banking, reducing thecapacity of lending, reducing the investor demand for bank equitiesand debts and lack of consistency in the implementation of Basel IIIacross jurisdictions. The profitability of firms is also likely toreduce. The fact that there would be many inconsistencies in theimplementation of the Basel III, as evidenced in the implementationof Base I and Basel II, implies that the financial system would besignificantly disrupted. However, there are views that Basel III isobjective and is outright in supporting positive economic growth, aslong as firms make informed change management strategies (Wallison,2013).

However,there are also discussions that the economy will be able to fare wellbecause businesses will adopt strategies to enable them survive thechallenges.Despitethe fact that most Basel III regulations have reached the finalstage, other regulatory reforms are still under adoption. Theseinclude capital surcharges, organization requirements, and liquidityrequirements. Considering that there are certain uncertainties thatare yet to be overcome, it obvious that firms would seek to adoptcertain behaviors to counter the uncertainties. Successful firms arethose that adopt sure moves by aligning the current capitalrequirements, as well as measurement of liquidity and a practice ofaccounting loses and profits. Some are making changes businessoperations to attract benefits under the new Basel III regulations(Miles,Yang &amp Marcheggiano, 2014 Kashyap, Stein and Hanson, 2012Bayoumi and Melander, 2013).

Financialinstitutions are also seeking balance-sheet restructuring, Successfulbanks are also characterized by adoption of new adjustment models.Many banks were compelled to conduct a review on their profitabilityin the face of new measures and regulations, as a way of maintainingcurrent returns. Besides profitability, firms have also sought tofocus on issues pertaining to affordability, considering capital andfunding scarcity expected in the future. The restructuring of balancesheet have been well placed in mitigating the capital quality, aswell as deduction of anomalies, while optimizing funding and balancesheet. These steps have beenthought to affect ROE by 40 percent (Awasthi, 2012). Indeed, Brownand De Haas (2012) reasons thatif 50 percent of such effects can be systematically addressed throughreduction of DTA, and this can effectively optimize corporateshareholding structure and financial statements, while balance sheetmanagement would reduce the costs related to funding. Furthermore, ithas been reasoned that business model adjustment implications on ROEhas been dependent on the ability of banks to optimize the productsof customers, as well as the risk tendencies and reduction ofoperation costs through adjustments of prices (Fried, 2012). Abuand Khan (2013) estimated thatsuch actions have the tendency of neutralizing as significant as 40percent of the ROE of Basel III on the banking sector. As far asindividual banks are concerned, the mitigation effect would dependupon the operation models, the starting models, and the nature ofcompetition of the environment in which they operate.

AsKing (2014) suggests, Banks could keep reserve balances to enablethem to control the cash flow. These will help in cases where thereare pending debts in which the banks need to clear. By doing this, itwill go a long way in controlling or absorbing the losses incurred bybanks. It is recommended that banks to lend more money to SMEs inorder to create room for a robust economic growth. Banks should focuson adjusting to the new models through capitalizing on the benefitsof the balance sheet. Proper balance sheet management andrestructuring will increase the profitability and reduce the fundingproblems affecting the banks that have not restructured it in theirsystem. In addition, banks should be commercially orientated tomaximize the profits they make. A good capital management strategy isa move in the right direction. Basel III framework makes it easierfor banks to have an overview of their performance index. This stepfurther helps them determine the necessary changes that should beconsidered in order to improve on the general business operations andthe fill the gaps that could be affecting the business negatively.

Theexamined literature all concur that introduction of Basel IIIframework should affect banks and SMEs, but in different ways.Nevertheless, an examination of literature simple limits one fromthinking that even one of these cases could be generalized. Forinstance, Elliot (2010) was keen to point out that stringentregulation effects are likely to vary, depending on firms’ businessmodels, sizes of the asset and region, yet increases in the rates oflending and reduction is the credit supply capacities are notprofound, considering that banks always strive to expand internal andcapital reserves to meet the requirements. In light of thesecompeting positions, two hypotheses can be generated.

H0:The Basel III framework will have adverse implications on USfinancial institutions

H1:The Basel III framework will not have adverse implications onfinancial institutions

  1. Finding
    1. The Case of Deutsche Bank

Theperformance of the firm balance sheet statement is as follows (DataSource DeutscheBank, 2015).

Period Ending

Dec 31, 2013

Dec 31, 2012

Dec 31, 2010

Assets

Current Assets

Cash And Cash Equivalents

524,863,000&nbsp&nbsp

644,626,000&nbsp&nbsp

611,023,000&nbsp&nbsp

Short Term Investments

– &nbsp

– &nbsp

– &nbsp

Net Receivables

257,567,000&nbsp&nbsp

249,728,000&nbsp&nbsp

230,649,000&nbsp&nbsp

Inventory

– &nbsp

– &nbsp

– &nbsp

Other Current Assets

– &nbsp

– &nbsp

– &nbsp

Total Current Assets

– &nbsp

– &nbsp

– &nbsp

Long Term Investments

1,603,972,000&nbsp&nbsp

1,973,893,000&nbsp&nbsp

1,908,493,000&nbsp&nbsp

Property Plant and Equipment

6,091,000&nbsp&nbsp

6,543,000&nbsp&nbsp

7,784,000&nbsp&nbsp

Goodwill

– &nbsp

– &nbsp

– &nbsp

Intangible Assets

19,198,000&nbsp&nbsp

18,746,000&nbsp&nbsp

20,920,000&nbsp&nbsp

Accumulated Amortization

– &nbsp

– &nbsp

– &nbsp

Other Assets

155,074,000&nbsp&nbsp

163,090,000&nbsp&nbsp

203,217,000&nbsp&nbsp

Deferred Long Term Asset Charges

9,744,000&nbsp&nbsp

10,168,000&nbsp&nbsp

11,190,000&nbsp&nbsp

Total Assets

2,220,446,000&nbsp&nbsp

2,666,185,000&nbsp&nbsp

2,556,520,000&nbsp&nbsp

Liabilities

Current Liabilities

Accounts Payable

2,205,000&nbsp&nbsp

2,095,000&nbsp&nbsp

3,671,000&nbsp&nbsp

Short/Current Long Term Debt

100,795,000&nbsp&nbsp

139,495,000&nbsp&nbsp

124,647,000&nbsp&nbsp

Other Current Liabilities

727,219,000&nbsp&nbsp

760,999,000&nbsp&nbsp

716,372,000&nbsp&nbsp

Total Current Liabilities

– &nbsp

– &nbsp

– &nbsp

Long Term Debt

746,216,000&nbsp&nbsp

1,068,198,000&nbsp&nbsp

964,994,000&nbsp&nbsp

Other Liabilities

366,937,000&nbsp&nbsp

398,621,000&nbsp&nbsp

432,094,000&nbsp&nbsp

Deferred Long Term Liability Charges

1,517,000&nbsp&nbsp

1,908,000&nbsp&nbsp

3,095,000&nbsp&nbsp

Minority Interest

340,000&nbsp&nbsp

315,000&nbsp&nbsp

2,078,000&nbsp&nbsp

Negative Goodwill

– &nbsp

– &nbsp

– &nbsp

Total Liabilities

2,128,611,000&nbsp&nbsp

2,579,049,000&nbsp&nbsp

2,490,994,000&nbsp&nbsp

Stockholders` Equity

Misc Stocks Options Warrants

16,434,000&nbsp&nbsp

15,941,000&nbsp&nbsp

16,434,000&nbsp&nbsp

Redeemable Preferred Stock

– &nbsp

– &nbsp

– &nbsp

Preferred Stock

– &nbsp

– &nbsp

– &nbsp

Common Stock

3,596,000&nbsp&nbsp

3,138,000&nbsp&nbsp

3,193,000&nbsp&nbsp

Retained Earnings

39,101,000&nbsp&nbsp

38,496,000&nbsp&nbsp

34,879,000&nbsp&nbsp

Treasury Stock

(18,000)

(79,000)

(604,000)

Capital Surplus

36,108,000&nbsp&nbsp

31,346,000&nbsp&nbsp

31,547,000&nbsp&nbsp

Other Stockholder Equity

(3,386,000)

(1,706,000)

(3,489,000)

Total Stockholder Equity

75,401,000&nbsp&nbsp

71,195,000&nbsp&nbsp

65,526,000&nbsp&nbsp

Net Tangible Assets

56,203,000&nbsp&nbsp

52,449,000&nbsp&nbsp

44,606,000&nbsp&nbsp

    1. The case of BNP Paribas

Theperformance of the firm balance sheet statement is as follows (BNPParibas 2015)

Currency in Millions of Euros

As of:

Dec 312010RestatedEUR

Dec 312011RestatedEUR

Dec 312012RestatedEUR

Total Revenues

39,347.0

35,793.0

36,923.0

35,053.0

Gross Profit

39,347.0

35,793.0

36,923.0

35,053.0

Selling General &amp Admin Expenses, Total

1,613.0

1,508.0

16,311.0

15,951.0

Ebt, Excluding Unusual Items

13,078.0

9,757.0

10,866.0

9,250.0

Impairment Of Goodwill

-78.0

-106.0

-490.0

-251.0

Other Unusual Items, Total

20.0

3.0

-810.0

Other Unusual Items

-798.0

Ebt, Including Unusual Items

13,020.0

9,651.0

10,379.0

8,189.0

Income Tax Expense

3,856.0

2,757.0

3,061.0

2,750.0

Minority Interest In Earnings

-1,321.0

-844.0

-754.0

-607.0

Earnings From Continuing Operations

9,164.0

6,894.0

7,318.0

5,439.0

Net Income

7,843.0

6,050.0

6,564.0

4,832.0

Net Income To Common Including Extra Items

7,531.0

6,050.0

6,282.0

4,580.0

Net Income To Common Excluding Extra Items

7,531.0

6,050.0

6,282.0

4,580.0

Currency In Millions Of Euros

As of:

Dec 312010RestatedEUR

Dec 312011RestatedEUR

Dec 312012RestatedEUR

Total Revenues

39,347.0

35,793.0

36,923.0

35,053.0

Gross Profit

39,347.0

35,793.0

36,923.0

35,053.0

Selling General &amp Admin Expenses, Total

1,613.0

1,508.0

16,311.0

15,951.0

Ebt, Excluding Unusual Items

13,078.0

9,757.0

10,866.0

9,250.0

Impairment Of Goodwill

-78.0

-106.0

-490.0

-251.0

Other Unusual Items, Total

20.0

3.0

-810.0

Other Unusual Items

-798.0

Ebt, Including Unusual Items

13,020.0

9,651.0

10,379.0

8,189.0

Income Tax Expense

3,856.0

2,757.0

3,061.0

2,750.0

Minority Interest In Earnings

-1,321.0

-844.0

-754.0

-607.0

Earnings From Continuing Operations

9,164.0

6,894.0

7,318.0

5,439.0

    1. The case of Barclays bank

Theperformance of the firm balance sheet statement is as follows(Barclays 2015).

Barclays Bank €m

2011

2012

2013

2014E

2015E

Net Interest Income

1,350

1,106

1,345

1,606

1,652

Total non-interest income

438

318

570

602

651

Total Income

1,788

1,424

1,915

2,208

2,304

Total Expenses

-1,687

-1,739

-1,470

-1,382

-1,325

Operating Profit / Loss

101

-315

445

826

979

Bad debt charge

-8,161

-2,529

-1,904

-833

-602

Operating profit after bad debts

-8,060

-2,844

-1,459

-7

377

Associates

-37

10

9

9

10

Profit on the sale of business

37

5

0

0

0

Profit / loss before tax

-8,060

-2,829

-1,450

2

387

Exceptional items

2,952

-1,001

-237

0

0

Profit / loss before tax

-5,108

-3,830

-1,687

2

387

Taxation (including levy)

1,188

183

90

-60

-60

Preference Share Coupons

0

0

0

0

0

Attributable Profit

-3,940

-3,647

-1,597

-58

327

Dividends

0

0

0

0

0

Retained profit

-3,940

-3,647

-1,597

-58

327

Per share data

Basic Earnings Per Share `(c)

-1.6

-0.7

-0.3

0.0

0.1

DPS (c)

0.0

0.0

0.0

0.0

0.0

NAV per share (c)

2.8

2.2

2.0

2.0

2.1

Profitability Ratios

Net-interest margin (incl ELG)

1.03%

0.91%

1.21%

1.55%

1.73%

Cost income ratio

94.4%

122.1%

76.8%

62.6%

57.5%

Return on Equity (RoE)

-107.8%

-28.4%

-14.7%

-0.6%

3.1%

Balance Sheet data

Total Assets

136,651

122,516

117,734.0

104,743

99,455

Average interest earning assets

131,038

122,200

111,004

103,553

95,765

Gross customer loans

98,600

89,900

82,835

79,693

78,552

Net customer loans

83,700

73,300

65,713

61,781

60,053

Customer deposits

60,700

63,600

65,667

61,000

60,000

Loan/deposit ratio

138%

115%

100%

101%

100%

Impairment charge

8.08%

2.58%

2.36%

1.02%

0.74%

Impaired Loans

26%

31%

35%

37%

37%

Coverage ratio

60%

56%

59%

61%

64%

Shareholders equity (incl Gov Prefs)

14,463

11,241

10,494

10,436

10,764

Capital

Risk Weighted Assets

84,279

71,417

62,395

61,000

61,000

Core Tier 1 Capital (Basel III phase in)

15,065

10,806

8,926

9,031

8,968

Core Tier 1 ratio (Basel III phase in)

17.9%

15.1%

14.3%

14.8%

14.7%

  1. Discussion

Thethree banks can be noted as performing well because of the behavioralmeasures they take. Therefore, the behavior of banks is a determinantfactor of how banks will perform under Basel III framework. Indeed,according to Ayadi, Llewellyn, and Schmidt (2010) the behavior ofsuccessful firms is denoted by a number of elements such as adoptinginformed investment strategies that would maximize the wealth of theinvestors, while generating cash flow that yield desirable liquidity.Banks that are performing well under the Basel III framework are alsoable to fulfill their financial obligations. Such banks are oftenwell placed to maintain stable ratios of assets, capital, andliabilities that are stipulated under the Basel III framework.

Itis also evidenced that banks that perform dismally are those that runbusinesses that are capital intensive. These banks have exhibitedlimited chance of regaining profitability recorded before theimplementation of Basel III. Retail and commercial oriented banks aremore profitable than business oriented banks. As a response to BaselIII, some successful banks had adopted comprehensive measures aimedat improving liquidity and capital management. In this regard, suchfinancial institutions are encouraged to maintains the strategiesand, if possible, redouble them, considering the opportunities thatfollow from liquidity, capital and funding efficiencies assured bythe Basel III framework (King, 2014).

  1. Conclusion and Recommendations

Inconclusion, this paper has sought to examine the impact of Basel IIIadoption, focusing on case study of the US financial institutions’stature. Literature on implications of Basel III implementation iswell documented — it spans theoretical, empirical studies,quantitative, descriptive, and observational studies, coveringvarious areas. However, they do not adequately state the impact ofBasel III on the US financial institutions. The methodology focusedon leverage ratio, liquidity ratio, capital and liabilities, ascapital requirement parameters that delineate efficient and poorperforming banks. Thus, this study considers that, by assessing theparameters of capital performance, the nature of performance of bankscan be understood, and potential impact be projected. The findingscan be generalized that the implementation of Basel III framework hasa significant impact on the performance of banks and it is largelydetermined by bank behaviors. In this regard, there is the need forbanks to adopt satisfactory behaviors that would stir desirableperformance.

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