The Effectiveness of the Basel Accords : Evidence from European Banks

Sammanfattning: Purpose:The purpose is to investigate the adequacy of the Basel Accords to fulfill the underlying ideas of reducing risk and stabilizing the financial sector, or if it allows banks to use regulatory arbitrage to maintain a desired productive efficiency- and risk level. Methodology:A two-step analysis is constructed where each bank’s efficiency is first estimated, followed by a panel data regression on the efficiency-score and on a proxy for bank risk.  Conclusion:We found evidence supporting that the third Basel Accord have been more effective, by a reduced risk as a consequence of both an increased capital adequacy ratio and the implementation. However, we cannot confirm that the capital requirements inhibit bank efficiency, but there is evidence of an impaired efficiency since the implementation of the third accord, suggesting that the supervision, for instance, has a weakening effect on efficiency. Moreover, there are also implication of the strengthened capital requirements, in terms of quantity and quality of capital, more efficiently fulfilling the accords purpose of reducing risk.