The Impact of Basel III on the Banking System and Economic Development in Eastern European Countries

Abstract

The article gives an assessment of banking activity regulation based on the implementation of Basel III requirements, which have become a response on the part of supervisory bodies to the prevention of crisis events. This was reflected in the toughening of requirements for capital and liquidity, which in turn required the revision of banking activity management methods. Basel III requirements are nonmonetary management methods oriented to restriction processes in the economy and financial system. In accordance with Basel III requirements, banks shall increase their capital safety margin and liquidity cushion and strengthen the control and monitoring of banking indicators. Banks will be forced to have a large stock of immediately available funds, increase their capital base and form a capital buffer. All this should have a positive impact on the banking system’s stability and banks’ capability to withstand financial shocks. However, it will also entail a reduction in banks’ free resources and a possible drop in the volume of bank operations, especially in the credit sector, which in turn will lead to a slowdown in economic growth. The objective of the study is to identify the influence of Basel III nonmonetary regulation methods on the banking system’s stability and economic growth. The study has been carried out based on financial accounting of banks in countries of Eastern Europe. The main outcomes of the study include identification of factors influencing economic growth, identification of the positive and negative impact of Basel III, determination of a relationship between GDP growth rates and fulfilment by banks of new regulations on capital and liquidity, and development of recommendations on the easing of nonmonetary regulation of banking activity in countries of Eastern Europe.