RBI Study – Adoption of BASEL norms vs Stock Price reaction

RBI has come up with an interesting working paper with respect to the Stock Price reaction on the RBI’s announcement of BASEL norms Implementation for Indian Banks. The study evaluates the market reaction to the RBI’s policy decisions related to the adoption of global Basel capital adequacy norms under the Basel Committee on Banking Supervision (BCBS). There are certain interesting insights to be observed from this research undertaken.  

The events considered as a part of the study includes 6 events spread over various timestamps wherein RBI announcements were made; the first was RBI’s decision to increase the minimum requirement of capital to risk-adjusted ratio to 9% as compared to 8% recommended by BCBS under BASEL-I norms. The second event was the issuance of final guidelines on the implementation of BASEL-II guidelines. The third event was the announcement of draft guidelines for implementation of Basel III capital regulations, while the fourth event was the measures adopted by Indian banks to comply with Basel III norms. The fifth event was the announcement for the extension of the implementation deadline for Basel III by one year and the final sixth event was the announcement effect of RBI’s decision to allow banks to expand the capital base of their Tier I capital.

The working paper focused on Indian nationalized/public sector banks and private banks but excluded all foreign banks not listed in Indian stock markets.

The study goes on to establish that the stock price returns showed a positive correlation to the various BASEL related announcements for the Indian banks in the long run. Similar such studies were conducted globally as well at different instances of time towards implementation of BASEL norms, and it was found that the Japanese economy gave a similar set of positive correlations in investor returns on account of capital regulation which outweighed the cost of raising new capital. Similarity with India was on account of the Japanese economy being a bank-centric economy just like the way the Indian economy is! However, results were different in other developed economies where on account of implementation it resulted in a reduction of funds for advancing loans, consequently reducing the profitability/interest margins for banks, hence markets reacted negatively.

As per the study, an initial increase of 1% in CRAR requirements reflected a negative sentiment in Indian banks’ investor appetite, however, with maturity, robustness and increase in shareholder funds to absorb risks; all other announcements had a positive effect on expected returns in the long run. And in fact, the reactions also differed in different cohorts i.e. investors reacted differently with respect to public sector banks on account of lower asset quality and need for higher capital & provisioning in contract to the investors of private sector banks. Further, the relaxation announced by RBI for extending the timelines for implementing BASEL-III guidelines/expanding the capital base was viewed positively by public sector banks due to mounting capital pressures and NPA levels.

This study surely paves the way for further research on the impact of regulations on the investor sentiments for the banks. The detailed paper is available at:

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