EFFECTIVENESS OF THE BASEL III FRAMEWORK: PROCYCLICALITY IN THE BANKING SECTOR AND MACROECONOMIC FLUCTUATIONS

This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks' performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio's volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.