Impact Of Regulatory Capital On European Banks Financial Performance: A Review Of Post Global Financial Crisis

The importance of having sufficient regulatory capital has undeniably attracted immense attention since the 2008 financial crisis. The notion is that increased capital requirement negatively impact the financial performance of the banks. Using structural equation modelling, the article employs 4503 European banks data from 2001 to 2005 examining the interaction of tier 1 capital and financial performance. The results indicate that the banks have grown post the 2008 financial crisis. Likewise, the tier 1 has increased but the increase is not in line with the expansion. As expected there is a negative association between tier 1 capital and financial performance. The results also indicate that the banks have diversified their revenue streams compared with pre-2008. In terms of efficiency, the results indicate that the cost income ratio post 2008 is higher than pre-financial crisis. The results imply that the regulators must take account of the expansion of banks and the increase in their capital levels.