How regulation of bank capital adequacy and liquidity affects pricing of bonds of the banks

Abstract

The article discusses the evolution of regulation of banks in Kazakhstan before and after financial crisis of 2007-2008. The purpose of the article is to examine how introduction of Basel III standards on capital adequacy and liquidity affected pricing of bonds of Kazakh banks. In general, post crisis reforms in the banking system, mainly Basel III standards, enhanced capital adequacy and liquidity of the banks. Banks now tend to hold more capital and high-quality liquid assets compared to pre-crisis period. Our analysis showed that banks with better liquidity conditions would receive cheaper funding via bonds compared to other banks. We found that bond prices reacted explicitly to the changes in liquidity requirements, rather than capital measures. New capital adequacy measures seem to be less constraining for banks with government support. In contrast, changes in capital measures made substantial impact on bond spreads of banks without government support, these banks actively increased their capital in post crisis period.