Regulatory reform and banking diversity: reassessing Basel 3

Abstract We investigate whether and how strongly Basel 3 chief innovations jointly affected in different ways individual Eurozone banks’ stability (z-score) across six business models (BMs). study this issue the initial years when adaptation was most intense (2011–2014) underwent a phase with sovereign crises abated by ECB policies easing financial conditions. In parallel, we run exercise over 2000–2010 data, time frame which did not apply yet to see through eyes of regulator. Irrespective BMs, identify leverage ratio as effective driver stability. However, impact on z-score drivers does seem differ significantly 2011–2014 vs. 2000–2010. Next, interactions BMs suggest that improve z-scores at traditionally focused banks (cooperative savings banks), vis-à-vis diversified banks. Our results regulatory decisions were questionable. First, front loading increased minimum capital requirements backloading phasing may have lured from credit assets. Second, our findings support desirability revising current “one-size-fits-all” European prudential framework, disregards BMs.