Impact of Basel III liquidity and capital regulations on bank lending and financial stability: Evidence from emerging countries

Abstract

AbstractWe examine the impact of Basel III's liquidity requirements, such as the liquidity coverage ratio (LCR), net stable funding ratio (NSFR), and capital adequacy, on bank lending and financial stability using data from 688 commercial banks of 10 developing economies from 2014 to 2021 using fixed effects panel estimation. The findings of the study support that bank lending is positively impacted by the regulatory capital and the short‐term liquidity requirement (LCR), but negatively impacted by the NSFR. We find that the bank's Z‐score benefits from achieving the required capital and liquidity requirements. Lending growth and bank stability are nonlinearly impacted by regulations governing bank capital and liquidity. Furthermore, we use the Generalized Methods of Moments‐Quantile Regression (GMM‐QR). Finally, our results indicate that regulators in these developing countries should support adequate capital and liquidity management to lessen adverse economic shocks' impact on banks' intermediation capabilities and stability.