The Impact of Basel III Regulations and Commercial Real Estate Loan Concentrations on U.S. Bank Performance

This thesis explores the impact of Basel III regulations on U.S. bank profitability, specifically how Commercial Real Estate (CRE) loan concentrations have impacted Risk-adjusted return over time. CRE lending has historically driven both growth and volatility within bank portfolios, a dynamic that has become increasingly complex with post-pandemic market shifts, rising interest rates, and declining property values. Using panel data from FFIEC Call Reports (2006-2023) and The Federal Reserve Bank of St. Louis's Federal Reserve Economic Data (FRED), this study analyzes how the evolving Basel III framework has influenced bank performance in varying market conditions. The regression model uses Risk-Adjusted Return on Capital (RAROC) as the dependent variable to capture profitability. The analysis investigates how CRE exposure, defined as the percentage of total loans allocated to CRE, and macroeconomic shifts affect bank profitability across three distinct periods during the buildup of regulations: pre-Basel III (2006-2010), Basel III rollout (2010-2020), and Basel III Endgame (2020-2023). The findings show that while banks initially increased profitability as they increased CRE loan concentrations, the full implementation of Basel III and heightened market stressors have significantly raised the CRE exposure threshold required for profitability. First the threshold was 22.25% in the mid-period, and it rose to 35.19% post-2020. These shifts highlight the unintended consequences of regulatory frameworks that, while designed to reduce systemic risk, may pressure banks toward riskier concentrations to sustain returns.