Management Summary
In response to the recent financial and ensuing economic crisis of 2007-2008, the Basel Committee on Banking Supervision announced a new set of measures – Basel III, which ought to create a more resilient banking system. It also intends to help contain adverse effects of financial system from spilling over to real economy. This, in turn, will allow real sector of economy avoid potential credit disruptions in future.
However, just as a coin has two different sides, Basel III might also have unintended adverse effects on real sector. Therefore, this research is addressed at analyzing possible effects of the new regulations on corporate financing.
Through review of relevant literature, we have been able to identify the most significant researches in the area to date. On one hand, advocates of Basel III argue for a substantial net economic advantage of around 2.6 per cent of annual GDP increase as a result of implementation and imply that society will be better off as a result. On the other hand, there are a number of critics, who state that prescribed tighter and liquidity requirements will create a two-side pressure on RoE of banks, prompting these to allocate less capital to lending business – thus decreasing credit, available to real economy.
As a result, after conducting two case-studies: one a bank and another on a non-financial corporate, it has been determined that, on one hand, larger banks, using market leadership position, relatively bigger size and also given efforts, directed at reduction of operational costs will be able to limit price increase of most of commercial banking products. On the other hand, it is defined that this is the right time for non-financial corporates for a wider direct financial market participation. In general, this paper extends support for the new banking regulations given a proper implementation.
As a closing point, a recommendation on how to best perform this strategic shift from traditional banking products to financial market products was proposed.
Keywords: Basel III, corporate finance, strategy tools
Table of Contents
1. WORD OF GRATITUDE
2. INTRODUCTION
2.1. Purpose of the research
2.2. Nature of the research
2.3. Approach of the research
3. LITERATURE REVIEW AND ANALYSIS
3.1. Corporate financing strategies
3.2. Expected impact of B III on commercial banks
3.3. Expected impact of Basel III on corporate financing
3.4. Research gap
4. CASE ANALYSIS AND STRATEGY IMPLICATIONS
4.1. Expected reaction of banks – Deutsche Bank AG case
4.1.1. Development of key financial indicators
4.1.2. Outlook for commercial banking products
4.1.3. Comparability with similar commercial banks
4.2. Resulting impact on corporate financing – BMW AG case
4.2.1. Current financing structure
4.2.2. Development of cost of debt capital
4.2.3. Comparability with similar auto-producers
4.3. Strategy implications
4.3.1. Outlook: is there a need for a change in financing strategies?
4.3.2. Adjusting the business for a wider market participation: recommendations for overall company strategy
5. SUMMARY
Research Objectives and Themes
This research aims to critically analyze the impact of the Basel III banking regulations on corporate capital-raising strategies, focusing on the potential consequences for larger European corporations, using Deutsche Bank AG and BMW AG as case studies to assess both banking and non-financial corporate perspectives.
- The influence of Basel III on bank balance sheets and product pricing.
- Corporate financing dependencies on traditional bank lending versus capital markets.
- Strategic implications for companies needing to adjust their capital-raising strategies.
- Empirical analysis of Deutsche Bank AG’s financial development under the new regulatory environment.
- Assessment of BMW AG’s financing structure and its resilience to banking sector shifts.
Excerpt from the Book
2.1. Purpose of the research
The most recent financial and ensuing economic crisis of 2007-2008 has proved just how much the world has become intertwined in many different ways. It is now not only financial sector and real economy of a single nation that are highly interlinked. Economies of many nations around the world are bound together in a way that any risk or opportunity, born in one economy is easily and swiftly transferred to several other economies.
What we have also witnessed in the recent turmoil is that how big financial service industry has grown as part of gross domestic product1. Greed and moral-hazardous attitude of financial institutions were among the drivers of this unbelievable growth in size of financial sector up to 2007, particularly in the United States (next: US). Backed by these two factors, financial institutions (e.g. Bear Stearns, Lehman Brothers and many others) have compounded, on or off their balance sheets, huge amount of toxic financial assets with unjustified risk levels such as e.g. mortgage collateralized debt securities (next: CDS). As a result of poor risk management in terms of inadequate capital as well as liquidity reserves, in combination with high interconnectedness and the market shock (i.e. burst of housing bubble in US), these financial institutions started collapsing one after another. Several of them were subsequently bailed out by the US government. However, one of the biggest investment banks – Lehman Brothers was allowed to fall down due to ever more criticized too-big-to-fail policy. This has sent a very strong shock not only through the US economy itself, but also has shaken several dozen economies all over the planet. In particular case of European banks, damage was not limited only with direct financial losses from sharply devalued securities, but also systemic
Summary of Chapters
1. WORD OF GRATITUDE: A brief acknowledgment of the author's academic journey and the contributors who supported the research.
2. INTRODUCTION: Outlines the research purpose, the context of the 2007-2008 crisis, and the approach taken to analyze the impacts of Basel III.
3. LITERATURE REVIEW AND ANALYSIS: Examines corporate financing strategies, the expected impact of Basel III on commercial banks, and the existing research gap regarding effects on specific firms.
4. CASE ANALYSIS AND STRATEGY IMPLICATIONS: Provides detailed case studies of Deutsche Bank AG and BMW AG to evaluate real-world impacts and suggests strategic recommendations for corporate financing.
5. SUMMARY: Synthesizes the core findings from the analysis, including 40 key takeaways regarding the banking and corporate responses to Basel III.
Keywords
Basel III, Corporate Finance, Capital Raising, Banking Regulation, Deutsche Bank, BMW AG, Debt Financing, Equity, Liquidity Risk, Financial Stability, RoE, Trade Finance, Asset-Backed Securities, Capital Adequacy, Strategy.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the impact of Basel III banking regulations on the corporate financing strategies of large European companies, specifically looking at how banks adapt and how this affects the capital-raising options available to corporations.
What are the central themes discussed?
The key themes include the resilience of the banking system, changes in corporate lending costs, the shift from traditional bank loans to financial market products, and the specific strategic adaptations of major German corporations.
What is the primary research goal?
The research goal is to perform a critical analysis of how new banking capital requirements influence the corporate sector and to offer practical, strategic recommendations for companies managing these financial shifts.
Which scientific methods were employed?
The study utilizes a combination of literature review and practical case study analysis, applying theoretical concepts of capital structure to the real-world financial data of Deutsche Bank AG and BMW AG.
What does the main part of the report cover?
The main section evaluates bank-level indicators and corporate financial structures, analyzing shifts in interest income, return on equity (RoE), and the reliance on diverse external financing instruments like bonds and commercial paper.
Which keywords best describe the research?
The primary keywords are Basel III, corporate finance, capital raising, banking regulation, financial stability, and strategic implications for corporations.
How does the implementation of Basel III affect corporate lending?
The report suggests that while Basel III increases capital costs for banks, the impact on corporations varies. Larger firms with access to financial markets may pivot to other funding sources, whereas smaller firms may be more susceptible to increased costs or reduced credit availability.
What are the findings regarding BMW AG’s financing?
The case study of BMW AG demonstrates that the corporation is heavily integrated into capital markets (e.g., bonds, asset-backed securities), meaning its exposure to traditional bank lending and associated Basel III cost increases is limited to approximately 10% of its total financing.
- Arbeit zitieren
- Miryusup Abdullaev (Autor:in), 2013, Basel III and corporate financing. Impact of the newest Basel III banking regulation accords on corporate capital-raising strategies., München, GRIN Verlag, https://www.grin.com/document/268840
