Basel III: Implications of Capital and Liquidity Regulations on Financial Stability during Economic Depression.

The dynamic global financial system has made it necessary to implement adequate regulatory measures that can effectively guarantee financial stability at the national and international levels. This thesis consists of three self-contained analytical chapters that focus on the effectiveness of evolving financial regulations in addressing systemic risk within the financial system. Despite numerous regulatory reforms introduced following the 2008 GFC, they are still concerns over the role of these regulations in mitigating complex issues related to systemic risk. The first study focuses on international and national regulatory frameworks in the context of conventional, hybrid, and Islamic banking. It analyses the guidance provided by the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) and examines the differences in the treatment of credit, liquidity, and systemic risk across four countries. The IFSB converts BCBS guidance to ensure compliance with Sharia principles for Islamic banks. Further insights show variations in liquidity and capital requirements imposed on banks in different countries, highlighting the need for countryspecific regulations to address the unique risks. The second study uses data from emerging market economies to investigate the relationship between capital and liquidity regulations under Basel III and their impact on default risk and systemic risk. The study addresses whether the new liquidity and capital requirements, such as the net stable funding ratio and higher capital adequacy ratio, contribute to alleviating the default risk and systemic risk in emerging market economies. The third study focuses on the relationship between credit and liquidity risks and their impact on bank default risk. It also addresses the effect of bank liquidity creation on systemic risk across different types of banks. The findings suggest that while credit and liquidity risks are positively related, no significant relationship exists. The impact of credit and liquidity risks on bank default risk is significant for conventional and hybrid banks, while bank size and capital adequacy ratio play a greater role in the stability of Islamic banks. The joint interaction between credit and liquidity risk negatively influences banking stability. The key findings demonstrate that Basel III's liquidity requirements, such as the Net Stable Funding Ratio (NSFR), play an important role in forecasting banks' default probability and mitigating systemic risk. The insights gathered emphasise the importance of incorporating new mitigating measures, including NSFR, leveraging requirements, countercyclical buffers, and globally systemically important institution surcharges to promote financial stability. Additionally, it demonstrates the relevance of liquidity creation in determining bank stability and its implications for systemic risk. This study offers substantial contributions to the growing body of literature by highlighting the differences in regulatory frameworks, the importance of this approach in developing bank risk profiles, and how they are adequately addressed. The study also contributes to understanding how financial stability can be enhanced while reducing systemic liquidity risk. The study shows that banks, regulators, and policymakers must collaborate adequately across all levels to align risk management and improve regulations and guidelines. This includes sharing information and fostering coordination at the international level.