The impact of the COVID-19 crisis on the resilience of the UK banking sector: The role of regulatory reforms

Details

Supervisors

Candelon, Bertrand

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

enThis paper analyses the impact of the COVID-19 crisis on the resilience of the UK banking sector, focusing on the role played by the Basel III regulatory reforms. The analysis is based on the Financial Soundness Indicators (FSIs) published by the IMF for the period 2010–2023 and uses a Difference-in-Differences econometric method to isolate the effect of regulatory reforms in a context of exogenous stress. The analytical framework used is the CAELS model, which assesses banking resilience across five key dimensions: capital adequacy, asset quality, profitability, liquidity, and sensitivity to market risk. The empirical results show that the COVID-19 crisis had a differentiated impact depending on the indicators, with certain dimensions, such as asset quality and liquidity, having withstood the crisis better thanks to public support measures. Furthermore, while the Basel III reforms strengthened the sector's structural solidity, their ability to mitigate the negative effects of the pandemic appears statistically limited, with a significant effect on a limited number of indicators. These results illustrate the complexity of the interactions between exogenous shocks and the regulatory framework, indicating that while Basel III has strengthened the structural soundness of banks, its role in mitigating the negative effects of the pandemic shock remains limited and varies according to the dimensions of banking resilience.