Abstract
The purpose of the research was to examine the impact of higher Basel III capital requirements on South Africa’s big four banks, based on market share. Specifically, the research sought to determine how higher capital requirements affect banks’ profitability in South Africa. To examine the impact of Basel III capital requirements on profitability, the available literature suggested the utilisation of a panel regression model.
The panel regression model uses a cross-sectional analysis involving secondary data. These secondary data related to the big four JSE-listed banks in South Africa, namely, Absa Bank, Standard Bank, Nedbank Limited, and FirstRand Limited. The data sample period was from 2001 to 2023. Guided by existing literature, the identified dependent variables used in the study were Return on Equity and Net Interest Margin. The identified independent variables were Capital Adequacy Ratio, Management Efficiency, Bank Size, Cost Efficiency, Dummy Variables (which denote change between Basel II and III, as well as the recession period), Gross Domestic Product (GDP), Inflation, and Prime Rate).
From a Return on Equity perspective, the results suggest a statistically significant positive relationship between Return on Equity and Capital Adequacy Ratio. Hence, an increase in Capital Adequacy Ratio would lead to an increase in Return on Equity. The results also imply a statistically significant relationship between GDP and ROE. From a Net Interest Margin standpoint, the results indicate a statistically significant negative relationship among Capital Adequacy Ratio, Management Efficiency, Bank Size and Cost Efficiency, and Net Interest Margin. This implies that an increase in the independent variables would lead to a decrease in Net Interest Margins.
Overall, the results suggest that changes in capital regulations influence banks’ profitability in South Africa, alongside other independent variables. The study had limitations regarding the availability of data and the inclusion of smaller banks under the Basel III regime.