Abstract

The financial crisis evolution world-over has evoked supranational, as well as, national prudential authorities to demand a bank capital reregulation process in order to lessen the potential social costs when a bank failure occurs. However, criticism of the more stringent capital requirements, equally by the academic community and the financial services industry, was ready in advance with a usual regulatory burden argument usage. Whether the regulatory costs are being internalized i.e. the higher financing costs are being compensated throughout the overheads reduction, or, on the other hand, they are being transferred to the bank clients, the bank profitability will come under a pressure. In line with a profitability fall, a bank and banking sector stability deteriorate. Thus, the capital requirements seem to be counterproductive. On the contrary to the aforementioned hypothesis, this paper argues and empirically demonstrates a positive interdependence between the regulatory capital (i.e. the capital adequacy ratio) and the bank profitability ratios (i.e. a return on assets and a return on equity), at least for the South-Eastern European banking sectors in the period from 2000 to 2010. Thus, rather than the agency costs hypothesis, the franchise value hypothesis has been empirically confirmed. The data sample has been composed of more than a 100 commercial banks from Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro, Macedonia, Romania, Bulgaria, Albania and Greece and a dynamic panel data analysis has been employed, with some descriptive statistics overview. Altogether, the research attempts to fulfill the gap which is perceived to exist in the empirical literature on the microeconomic consequences of the capital requirements, to be more precise, profitability of the commercial banks in the selected banking sectors. Moreover, this paper adds to a body of literature in which the capital requirements are seen as an appropriate tool for ensuring the banking stability.