Basel III capital regulations and bank profitability

This study models the impact of new capital regulations proposed under Basel III framework on bank profitability in India by constructing a stylized representative bank's financial statement. It shows that, with an increase in the capital ratio in the context of new capital regulations, the banks tend to experience a rise in interest income. The results indicate that in the case of scheduled commercial banks, assuming that RWAs are unchanged, for 1‐percentage point increase in capital ratio, interest income would rise by 17 percentage points and would go up to an extent of 62 percentage points for six‐percentage‐point increase assuming that the risk‐weighted assets are unchanged. It also provides the estimations for different groups of banks and the scenarios of changes in the risk‐weighted assets, and changes in the capital ratios.