Value relevance of risk-weighted capital adequacy ratios before and after the Basel II regulation in European banks

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi
dc.contributor.advisor Niemi, Lasse Reunanen, Mikkomatti 2017-08-17T13:42:52Z 2017-08-17T13:42:52Z 2017
dc.description.abstract Banking is one of the most regulated industries in the world. One major part of the regulation is the capital adequacy regulation which restricts the minimum level of capital banks are required to hold. The best known capital adequacy regulator is the Basel committee on banking supervision which is responsible for the regulation regimes known as Basel I, Basel II and Basel III. Study by Vallascas and Hadendorff (2013) prove that the updated capital ratios in Basel II can explain better the true risk banks face. Due to improved qualities, the ratios should be more useful for investors to be used for market valuation of banks. However, only few researches have been conducted about the market valuation of banks and it is still undiscovered how the changes in capital adequacy ratios affect the valuation. This thesis examines the theoretical and practical value relevance of capital adequacy ratios before and after the Basel II implementation in European banks. By value relevance this thesis means the capability to explain the level of market value, not changes in it. This thesis is unique in multiple ways. European banking sector is not widely covered as most of the studies use U.S. data. Also most of the banking valuation models use unweighted capital ratios instead of risk-weighted regulatory ratios and the studies show mixed results on the effect of capital to banks’ Market-to-Book value. Although the changes in regulation have been studied in multiple ways, the value relevance of improved regulation has not been covered. Data for the research is collected from multiple sources and the final data consist of 448 bank-year observations from 41 banks within years 2002 and 2015. In order to compare the effect of the regulatory changes the data is divided into two subsamples, the prior including observations from 2002 to 2004 and the later from 2010 to 2012. Four different methods are used to evaluate the 5 attributes of value relevant performance measure during both subsample periods. The five attributes evaluated are Persistence, Predictability, Predictability of future cash flow, Substitute for cash flow and Timeliness. The models are adjusted from the methods used by Barton et al. (2010) to suit better the capital adequacy measures. Again, four different methods are used to evaluate the practical value relevance of capital adequacy ratios from which three are modifications from the model created by Calomiris and Nissim (2014). Dependent variable is the three month-forward Adjusted market value of equity divided by Common equity. The results show that three from the five theoretical value relevance attributes have improved after the regulatory changes. The conclusion is that theoretical value relevance of Tier 1 Capital ratio has improved. The practical value relevance however does not show similar improvements. The correlation between Tier 1 Capital ratio and Adjusted Market-to-Book ratio has increased but the explanatory power of capital adequacy ratios shows no improvements. Also the effect of capital adequacy ratios to Adjusted Market-to-Book ratio has become lower – even negative – and statistically insignificant. Thus, the results show clear controversy between the theoretical and practical value relevance of capital adequacy ratios. en
dc.format.extent 95
dc.language.iso en en
dc.title Value relevance of risk-weighted capital adequacy ratios before and after the Basel II regulation in European banks en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Business en
dc.contributor.department Laskentatoimen laitos fi
dc.subject.keyword capital adequacy en
dc.subject.keyword bank valuation en
dc.subject.keyword value relevance en
dc.subject.keyword Basel regulation en
dc.identifier.urn URN:NBN:fi:aalto-201708176707
dc.type.ontasot Master's thesis en
dc.type.ontasot Maisterin opinnäyte fi
dc.programme Accounting en
dc.subject.helecon laskentatoimi fi
dc.subject.helecon pankit fi
dc.subject.helecon pääoma fi
dc.subject.helecon likviditeetti fi
dc.subject.helecon arvoanalyysi fi
dc.subject.helecon arviointi fi
dc.subject.helecon mittarit fi
dc.ethesisid 16004
dc.location P1 I fi

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