The impact of capital requirement on banks' return

Abstract

This thesis shows that the change in capital ratio has either a small impact or no impact at all on banks performance. Two models were used to study this relation: a non linear model introduced by Zivot and Andrews (2002) integrating structural break within unit root and a panel model testing for unit root, correlation and regression. The Zivot Andrews model failed to match the break dates in the stock return with the introduction of regulation for both Europe and Japan. While this result doesnt show the impact of regulations on the banks performance, it is not enough by itself to confirm the absence of any impact. For this reason, a larger sample was taken including Germany, United Kingdom, France and Japan. A panel model using exhaustive bank level data was estimated to study the relationship between the banks performance and the change in capital ratio. Banks performance is reasonably immune to a change in capital requirement.