Basel III, balance sheet structure and bank performance: a balance-sheet transmission channel perspective

Abstract

Research on the effects of prudential regulation on bank performance remains divided between a cost view and a soundness view, partly because studies often relate the intensity of the regulatory constraint directly to profitability without making explicit the balance-sheet adjustments that lie between them. This conceptual paper addresses the following question: through which adjustments of the balance-sheet structure can Basel III requirements affect banks' intermediation margin and performance? It relies on an integrative and critical review of 74 documents published between 1958 and 2026, drawn from ScienceDirect, Wiley Online Library, JSTOR, SSRN and RePEc and from the publications of the Basel Committee and Bank Al-Maghrib, selected according to explicit inclusion criteria and ranked by the quality of their identification strategy. We argue that capital, leverage, short-term liquidity (LCR) and stable funding (NSFR) requirements act on distinct parts of the balance sheet and do not become binding for the same banks or at the same time. A stylised decomposition of the margin specifies the conditions for a scissors effect on the intermediation margin, defined as a simultaneous fall in the average yield on assets and rise in the average cost of interest-bearing funding attributable to prudential constraints. The paper derives a conceptual framework that includes moderating variables and feedback loops, together with five propositions stated with their indicators, expected signs and falsification conditions. It finally outlines their empirical testing in an intermediation-based system, the Moroccan banking sector, and draws distinct implications for supervisors, for banks' asset-liability management and for empirical research on prudential regulation.

JEL Classification: G21, G28, G32

Paper type: Theoretical research (conceptual paper based on a critical literature review)