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

Abstract

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.