BASEL III CAPITAL REGULATIONS AND BANK EFFICIENCY: EVIDENCE FROM COMMERCIAL BANKS OF NEPAL

Abstract

Regulating an industry is often driven by the recognition of market imperfections or the potential for market failures, which can incur significant costs for society. However, it's essential to acknowledge that regulation comes with its own costs, and it's crucial that the costs do not outweigh the anticipated benefits. The deregulation of financial markets in many countries during the 1980s was motivated by a desire to enhance market efficiency by removing regulatory constraints. Despite subsequent regulations such as the Basel I and II accords, it's important to consider this historical context when discussing further regulation of the banking sector post-2008 financial crisis. Managing the regulation of the banking industry is a delicate balancing act. The nature of banks' activities, particularly their asset transformation through credit and liquidity creation, leaves them inherently vulnerable. Even minor disruptions in this process can have farreaching consequences for the overall financial stability of the system. Additionally, given that banks are primary providers of payment services, the stability and reliability of these institutions are vital for facilitating trade and other payment-related activities within the economy. This study aims to analyze the efficiency of Nepalese commercial banks, particularly in the aftermath of the 2008 global financial crisis when Basel III regulations were widely adopted by banks around the world. To achieve its objective, the researcher conducted two regression model to examine operational and investment efficiency of Nepalese commercial banks as a result of implementation of Basel III capital regulation. The study utilized audited annual reports from five sample banks that have adopted the Basel III Accord. These banks are Siddhartha Bank, Machhapuchchhre Bank, Kumari Bank Limited, Nepal Investment Mega Bank (NIMB), and Global IME Limited. The analysis covers the period from fiscal year 2069/70 to 2078/79. The findings revealed the model 1 is statistically insignificant and all variable had negative relationship with OETA in case of operational efficiency regression analysis. Whereas model 2 showed statistically insignificant result with MCR and CAR is positively related but insignificant, CPB is negative and significant mixed result is archived in case of investment efficiency regression analysis. Thus, it can be concluded that the relationship between the independent variables has a very low impact on the efficiency of commercial banks in Nepal. It is due to not considering various other factors which are directly or indirectly involved in evaluating banks efficiency such as banks risk strategies, size and structure, transition phase of capital regulation. Keywords: Nepalese commercial banks efficiency; Minimum capital requirement; capital adequacy ratio; capital buffer premium;