Basel III capital regulation and bank profitability in the emerging market

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Abstract

The Basel Committee on Banking Supervision (BCBS) introduced Basel III in 2010 in response to the 2007/2008 global financial crisis, to strengthen the banking sector by imposing higher capital and liquidity requirements (BCBS, 2010). The intention is to bolster resilience and avert the domino effect on the real economy. However, there are concerns regarding its potential influence on bank profitability (Al-Sharkas & Al-Sharkas, 2022). This study examines the impact of Basel III capital regulation on the profitability of South African banks and adds to the ongoing discourse on the nexus between banking regulations and bank performance. Utilizing the general methods of moments (GMM) estimation on a dataset of 10 banks spanning 2010 to 2022, the results show an insignificant negative effect of Basel III capital requirements on South African banks, possibly due to stringent oversight by the South African Reserve Bank (SARB). Additionally, the evidence implies that South African banks have successfully adapted to the new regulatory environment, complying with Basel III requirements without sacrificing their profitability. This resilience indicates a robust banking sector that is capable of withstanding regulatory changes without a detrimental impact on profitability.

Keywords: Basel III, Capital Requirements, Bank Profitability, General Methods of Moments, South Africa

Authors’ individual contribution: Conceptualization — Z.M.; Methodology — Z.M. and L.J.; Investigation — Z.M. and L.J.; Writing — Z.M. and L.J.; Supervision — L.J.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G11, G18, G19, G21, G28

Received: 18.06.2024
Revised: 04.10.2024; 13.02.2025
Accepted: 19.02.2025
Published online: 21.02.2025

How to cite this paper: Mdandalaza, Z., & Jeke, L. (2025). Basel III capital regulation and bank profitability in the emerging market [Special issue]. Risk Governance & Control: Financial Markets & Institutions, 15(1), 150–162. https://doi.org/10.22495/rgcv15i1sip1