Influence of regulatory capital requirements on the self-financing capacity of a banking company

This article [written by Ivica Klinac, Anita Pesa, Berislav Bolfek ] – published in Business and Economic Horizons, Volume 15(1), 2019.

Title: Influence of regulatory capital requirements on the self-financing capacity of a banking company

Abstract: This paper explores activities of the banking companies in the new regulatory environment of the European banking system. For this purpose, the dynamic panel data models are estimated by utilizing the system GMM estimator. The research sample consists of 35 publicly listed groups of banks operating in the period from 2000 to 2016, selected by size of assets. The chosen banking companies are unquestionably market makers on the bank-centric economy of the EU. Hence, the research is in line with other current empirical works regarding the post-Basel III Standard adjustment of the banking industry as a whole. The model results show that the required increase in capital position affects the lack of bank credit activity towards the non-financial sector. The banks can maintain the higher regulatory capital ratio and self-finance the required growth by increasing the volume of share capital. Asymmetric information about the bank’s net worth discourage public investors to get into the shareholders position, which results in further bank lending constraints and reduced profitability. Potential growth of the revenue from non-credit risk operations cannot compensate for the negative pressure on the real value of the banking firm. From the policy-making perspective, the paper concludes that the resolution of structural problems of non-performing credit assets under new regulatory conditions should contribute to restoring the confidence of the investment public towards the self-financing capacity of the banking industry as well as bring the banking system back to the traditional client-oriented business model.

 

Keywords: Return on equity, capital requirements, credit assets, dynamic panel models

 

Citation: Klinac, Ivica., Pesa, Anita., Bolfek, Berislav. Influence of regulatory capital requirements on the self-financing capacity of a banking company. Business and Economic Horizons, Vol.15, Issue1, pp.70-89. DOI: http://dx.doi.org/10.15208/beh.2019.5