Italian banks facing Basel 3 higher capital requirements: which strategies are actually feasible?

The new capital requirements imposed by Basel 3 involve Italian banks adopting strategies aimed to reach the tighter required standards. Higher profitability, lower risk weighted assets, higher retained earnings and lower loans to customers supply represent some of the strategies that could be adopted by banks in addition to a shareholders’ equity increase. Each one of them, however, could be differently convenient in terms of costs and benefits for the banks themselves and could bring different impacts for the financial system and the real economy. In this paper, adopting an accounting model based on a sample of ten Italian banking groups, we analyse each of these possible strategies, making a comparison between what should have been done to achieve higher capital requirements, what banks actually did between 2011 and 2013 and what they are going to do in the upcoming years, as pledged in their business plans. The aim is to investigate how banking strategies have recently evolved and how they could or should change in perspective in a context of already weak performance. The results show that to achieve the patrimonial purpose, it would be necessary to increase the profitability at least of 1 percentage point, on average, or, alternatively, to deeply reduce the riskiness, the assets’ growth or the dividends pay-out ratios. But above all, that the economic conditions have made and will make the adjustment process extremely difficult to complete.