CARs In the Driver’s Seat: The Battle Between Capital and Stock Performance

Sammanfattning: After the financial crisis of 2008, the Basel Committee on Banking Supervision created the latest Accord for capital requirements: The Basel III Accord. Basel III set higher requirements for both quantity and quality of capital, with the aim to mitigate systemic risk. Previous literature has however shown that high capital requirements have been associated with a lower performance of banks’ stock returns. This thesis will investigate the relationship between banks’ capital structure, specifically Capital Adequacy Ratios (CAR), and the stock returns, as well as Beta values, of the four major Swedish banks. The existing literature has researched the correlation between banks’ profitability and capital requirements before, which we will use as a foundation, but we found that the specific relationship between CARs and stock returns had not been estimated, as far as we know. We believe that observing this relationship will further the research and discussion on how the Basel III Accord and capital requirements in general affect banks. We have conducted an empirical analysis by using data on the four major Swedish banks from 2010-2022. Sweden has among the highest capital requirements in the world and has come far in their implementation of Basel III. We applied the Capital Asset Pricing Model (CAPM) for the different four banks and then a panel regression model to estimate the empirical relationship between CAR and Stock Returns, allowing for the CAPM to play a part. The results we derived show a negative correlation between Capital Adequacy Ratios and Stock Returns. We also found that Capital Adequacy Ratios significantly reduce the Beta Value of stocks.