How to reach all Basel requirements at the same time?

We use confidential bank-level data from the BCBS’s quantitative impact studies between 2011 and 2014 to document how banks have been adjusting to Basel III solvency and liquidity requirements. We first develop a non-linear optimization model to assess how banks’ balance sheets should have adjusted between 2011 and 2014, absent any external factor other than the new regulations. We find that the increase in capital observed during this period was far larger than that predicted by our model, thus suggesting that banks may have faced pressures from financial markets. In contrast, the observed increase in HQLA was lower than that predicted by the model. We then use the model to assess the adjustments that were still needed, at the end of 2014, for banks to fully comply with Basel III. Based on data at the end of 2014 (and assuming, beyond 2014, a change in deposits similar to the one observed in 2011-2014), we find that the required adjustment in HQLA still necessary to meet all Basel requirements, w as half of the one achieved in 2011-2014, and that the required adjustment in capital would come exclusively from TLAC. Finally, any required increase in capital helps to fulfil liquidity regulation but the reverse is not true.