“Factors influencing the implementation of Basel III: An empirical analysis of the UAE banks”

Basel III accord was introduced in 2010 to support banks facing the sever effect of the 2007–2008 financial crisis in terms of liquidity and capital adequacy. The importance of this paper stems from the investigation of the implementation of this Accord in the UAE, and what are the reasons behind the effective implementation. While some previous studies on the UAE have examined Basel Accord, no studies have so far examined the effective implementation of Basel III. In this study, a modified questionnaire was used, a total of 90 bank senior managers responded to the questionnaire and their responses were used to answer the research questions and hypotheses. The results of the regression analysis support the hypotheses proposing a significant positive rela- tionship between implementation effectiveness and expected benefits and availability of resources needed. The results of the analysis did not support the influence of the variables of awareness, the role of management, and the role of the central bank. Based on the findings of this study, three recommendations were made. First, to promote the effective implementation of the Basel Accords in the UAE’s banking sector. Second, banks should review current implementation processes and plans to ensure that em- ployees understand the requirements for implementing Basel III. And third, the UAE Central Bank should be more involved in setting a framework for implementing regu- lations to ensure the effective implementation of Basel III.


INTRODUCTION
In 2010, the Basel Committee on Banking Supervision (BCBS) announced Basel III (hereafter Basel III) standards as a response to the Global Financial Crisis (2007)(2008) to cover the pre-crisis framework shortcomings and provide a resilient banking system foundation that resists systemic vulnerabilities (BCBS, 2010). The BCBS accords are aimed at strengthening the resilience of banks in light of the impact of the financial crisis by regulating and standardizing capital banking practices (KPMG, 2018).
The Basel Committee on Banking Supervision -initially the Committee on Banking Regulations and Supervisory Practices -was established in 1974 as a response to serious failures in the international currency and banking market (BCBS, 2018).
The first Basel Accord (Basel I) was introduced in July 1988 with a focus on credit risk based on the bank asset classification system that requires internationally active banks in the G10 countries (The United States, the United Kingdom, the Netherlands, Canada, Belgium, France, Germany, Italy, Japan, Sweden, Switzerland, and Luxembourg) to hold a minimum total capital equal to 8% of risk-adjusted assets.
In 2004, the Committee introduced the Basel II Accord (BCBS, 2018). This new framework was designed to improve the way regulatory capital requirements reflected underlying risks (BCBS, 2018). The Committee expected Basel II accord to "provide strong incentives for banks to continue improving their internal risk-management capabilities" while making available the tools necessary to adapt to the rapid market changes and issues (Gottschalk & Griffith-Jones, 2006;Ferguson, 2003). Basel II did not change the ratio of capital adequacy and maintained the capital base requirement of Basel I; however, it introduced detailed and clear criteria for treating credit risk, as well as market and operational risks (Al-Tamimi, 2008).
As a response to the 2007-2009 financial crisis, the Basel Committee on Banking Supervision introduced major revisions to the Basel II framework in Basel III (BCBS, 2010). In 2007, the international banking sector collapsed into a financial crisis due to having too much leverage coupled with inadequate liquidity buffers, poor risk management systems, as well as inappropriate incentive structures. These factors led to the poor assessment of credit and liquidity risks and excess credit growth. To strengthen the Basel II capital framework, the Committee issued the Basel III Accord in 2010, which included new capital and liquidity risk measurement and monitoring standards as a more resilient global regulatory framework (BCBS, 2010).
Basel III included new components covering liquidity standards, capital norms, leverage and risk coverage (Boora & Jangra, 2019). The Basel III components advised strict liquidity and capital standards to ensure financial stability through increasing the shock absorbing ability of banks during unexpected crises while enabling banks to manage all perceivable kinds of risks (Tanna, 2016). Basel III promised benefits, namely efficient management of risk and portfolios, effective supervision, more transparency in operations, as well as more risk-sensitive and balanced risk-return (Tanna, 2016).
Basel III can be divided into two phases: the 2010 framework and the reforms of 2017. The 2010 phase of Basel III focused on strengthening the quality of bank regulatory capital, increasing the level of capital requirements to ensure resilience in times of bank stress, enhancing the risk capture for the risk-weighted capital framework, introducing capital buffers and exposure systems to mitigate risks, enhancing the minimum leverage ratio, and introducing an international framework for mitigating excessive liquidity risk. The 2010 Basel III framework required banks to maintain higher quality capital to cover unexpected losses, enhanced risk capture by increasing capital requirements based on market risk, focused on bank leverage ratio to ensure adequate debt availability for funding banks investments and activities, improved the banks' liquidity that is sustainable for 30 days during times of stress, and called banks to build capital buffers to fall back on during times of economic strain (BCBS, 2010). The 2018 Basel III reforms were aimed at restoring credibility in the calculation of Risk-Weighted Assets (RWAs), since discrepancies and variations in the RWAs calculation were found across banks, as well as at improving the standardized approaches for calculating banking risks (BCBS, 2017 a,b,c).
Regions and countries around the world have had different implementation processes of the Bank for International Settlements (BIS) regulations such as Basel III (Chabanel, 2011). While the European Union has consistently applied the Basel frameworks, the story in the Americas, Eastern Europe, Africa, and the Middle East is different (Chabanel, 2011). Some countries have fully implemented the BIS regulations, while others selected elements of the frameworks such as the standardized approach for calculating credit risk (Chabanel, 2011).
An attempt was made to answer six questions and six hypotheses by using some statistical tools, regression and ANOVA analysis.
The main findings of this study are: 1. The results of the regression analysis unexpectedly did not support a significant positive relationship between implementation effectiveness and awareness/understanding of Basel III. When it comes to the Basel II framework, Ionescu and Vilag (2013) listed the expected challenges and impact of the implementation of the framework as providing a more complex regulatory environment that is both time and resource consuming, creating barriers and higher investment requirements that are costly, and deepening competition in the market. The observed benefits of Basel II increased the level of transparency of financial information and improving risk management practices (Ionescu & Vilag, 2013).

THEORETICAL BACKGROUND AND HYPOTHESES DEVELOPMENT
When studying the implementation of Basel II in low-income countries, Gottschalk and Griffith-Jones (2006) found that while Basel II improved the strength and stability of the international financial system, it presented a number of challenges in the implementation process. Their findings are derived from interviews conducted with 8 low-income countries in the sub-Saharan Africa (Botswana, Ethiopia, Ghana, Kenya, Lesotho, Tanzania, Uganda and Zambia) and concluded that the implementation of Basel II in these countries was challenged by the available human skills and resources to grasp thorough and sufficient understanding and knowledge of the framework to ensure proper implementation. They also faced challenges with regards to technical capacities, as well as the availability of sufficiently reliable data to banks to run the framework's models accurately (Gottschalk & Griffith-Jones, 2006). Other challenges Gottschalk and Griffith-Jones (2006) presented were the rise of competitiveness between national and foreign banks who had varying capacities and capabilities for implementing the framework, and the expected macro-economic impact of Basel II.
Similarly, Al-Tamimi (2008) explored the preparedness of the UAE's banks to implement the Basel II framework. His study found that the UAE's banks were prepared to effectively implement the framework depending on satisfying the following requirements: having sufficient resources for the implementation process, and that employees of the UAE banking sectors had thorough understanding of and education on the revised framework. His results also found no difference between the readiness of the UAE's national and foreign banks for implementing Basel II, which eliminated the challenge of having a competitive advantage between both types.
Literature on Basel III agrees that capital is a major pillar in supporting financial stability (Caruana, 2012;Brei & Gadanecz, 2012). Basel III proposes that more capital and improved quality are the way to strengthen the resilience of the financial system (Bors, 2015). Basel III was intended to introduce a global regulatory framework that ensures more resilient banks and banking systems by improving the sector's ability to absorb financial shocks regardless of their source while reducing risks of negatively impacting the economy. Kaur   (2011) all also concluded that Basel III implementation is expected to strengthen the risks absorption capacity of banks while reducing the possibility and fragility against future banking crises. They also found that the effective implementation of Basel III requires extensive availability of resources to cover the implementation costs of stronger capital and liquidity requirements, maintaining data acquisition and reporting systems, and ensuring the training and education of the human resources.
Studies also found the level of understanding and education as an underlying factor affecting the challenges associated with the effective implementation of the Basel framework. Liste et al.  (2011), all report some of the challenges (understanding and education) associated with the effective implementation of Basel III. These challenges include the introduction of a new finance management culture that requires a higher level of understanding and involvement of management and regulators in implementation process, the variations amongst difference geographies, as well as capabilities of emerging economics and sectors, and challenges in reporting and acquiring data. Kaur and Kapoor (2015) identified that Basel III implementation is expected to affect emerging economies at a different scale by affecting the macroeconomic performance, increasing risk exposure of investment due to massive outflows of foreign funds in emerging countries, downsizing activity in investment banking as customers would be tempted to take risks outside the banking system resulting in an increase in systemic risks, and might cause liquidity strains in the market resulting the Central Banks getting involved as providers of liquidity.
Amorello (2016) summarized the Basel III constraints that led to these economic implications as based on its extreme complexity, its continued dependence on model-based regulation to calculate capital requirements, failure to capture a number of risks, and inconsistencies in the disclosure of requirements. This is also a strong indicator of the vital role of the availability of sufficient resources in the banking system along with extensive awareness and understanding of the framework for the effective implementation of the Basel III framework. In examining the effective implementation of the UAE for the Basel III framework as a buffer against global financial crises and a risk management system, this study can consider both conventional and Islamic banks in the UAE under the same model. This is considering the financial effects of crises and failures to cover the various kinds of banking risks are global and universal across both conventional and Islamic financial systems. When Islamic banks seek to develop products similar to those in the conventional banking system, this will expose Islamic banks to risks similar to conventional banks, making them more vulnerable in a financial crisis (Setiawan, 2018 In the light of the stated objective of this research, the following hypotheses are developed: H1: There is a positive and significant relationship between the effective application of Basel III and the expected benefits.
H2: There is a significant and positive relationship between the effective implementation of Basel III and the support of the Central Bank.
H3: There is a significant and positive relationship between the effective implementation of Basel III and the positive attitude of the bank's top management.
H4: There is a significant and positive relationship between the effective implementation of Basel III and the understanding of the content of Basel III.
H5: There is a significant and positive relationship between the effective implementation of Basel III and the availability of resources. H6: There is a significant difference between the conventional and Islamic banks regarding the effectiveness of the implementation of Basel III.
Following the extensive literature above and based on the commonality of various variables studied as factors influencing the effective implementation of Basel III and its predecessors Basel I and II in a number of countries internationally, the following theoretical framework is proposed using the most influential and effective factors (Figure 1).
To answer the research questions, descriptive statistics were used in the data analysis section, while to test the first five hypotheses of the research, the following regression model (1) was used: where BEIM -implementation effectiveness; EXBexpected benefits from Basel III Implementation; BAW -Basel II awareness; ARN -availability of resources needed; BMT -the role of bank management; CBR -the role of the UAE Central Bank. For the last hypothesis (H6), ANOVA analysis will be used.

Questionnaire development
This research paper depends on data collected using a modified questionnaire (Ernst & Young, 2006; and Al-Tamimi, 2008), which includes two sections. The first section consists of general information and demographics data, the second section covers five aspects, namely, anticipated benefits of implementing Basel III, understanding and awareness level of the revised Basel III, availability of bank resources to facilitate the implementation, the role of top management in the implementation and the role of the Central Bank support.
The second part includes 50 questions based on a seven-point Likert scale (with 7 corresponding to "Strongly Agree" and 1 corresponding to "Strongly Disagree") with the questions corresponding to each of the aforementioned aspects. Therefore, the questionnaire comprises 54 questions (four demographic-specific and 50 related to this study's variables). The questionnaire draft was piloted by three academicians and three practitioners.
Accordingly, changes were made and some questions were reformulated.

Sampling and data collection
The population selected for this research paper is based on a convenient sample of senior bank managers who have worked in the risk management office and Basel (I, II and III) implementation in both conventional and Islamic banks.
The questionnaire was anonymous, and participants were assured that all collected data would be used to research purposes only. Due to the native language of the UAE being Arabic, for convenience, this study handed out both an English and an Arabic version of the questionnaire. The sample was carefully selected to ensure that the questionnaire respondents were highly aware and involved in the research subject and therefore provide more reliable responses (McCombes, 2019).
A total of 103 questionnaires were successfully distributed in hard copies or via emails urging respondents to fill a Google Form of the questionnaire. Of the 103 bank managers to whom the questionnaires were sent, 13 were excluded for being either incomplete or the participant did not respond; 90 bank senior managers responded to the questionnaire and those are counted in the data analysis section. The 90 represent an effective response rate of 87.37% of the total sample, which is acceptable for this study's purposes.

DATA ANALYSIS AND RESULTS
This section focuses on discussing the data analysis and results. It consists of three parts; In the first one, the profile of the respondents is discussed, in section two, the reliability of measures is examined, and in the third, some descriptive statistics are discussed and the study's hypotheses are tested.

Respondents characteristics
This study's questionnaire included four demographics questions to collect data on the respondents' gender, bank type, experience in banking (in years), and their education background. This was to provide some insight into the respondents' knowledge, as well as draw patterns related to the research from their answers.  .796 Implementation effectiveness (BEIM) .801

Availability of resources Needed (ARN)
.806

Role of bank management (BMT)
.819

Central Bank of UAE's Role (CBR)
.797 Using Cronbach's Alpha, a reliability of measures test was conducted, which allowed measuring the reliability of the different selected factors hypothesized to contribute to the effective implementation of Basel III in the UAE. A reliability measure tells researchers that a high reliability score indicates that it is effective in measuring the assumed result, and low reliability indicates that it is not. Peters (2018) states that the acceptable Cronbach's Alpha value is 0.7 and above, which means that factors with the Alpha value of 0.7 and higher are consid- ered reliable. Table 2 shows the Cronbach's Alpha results of the factors as reliable as they range from 0.796 to 0.819. To identify the factors that have the greatest influence on the effective implementation of Basel III and to answer the research questions, Table 4 shows the classification of factors in each category and their means. For the first variable "Expected Benefits" (EXB) with a mean of 5.47, the most influential factor has a mean of 5.74 as respondents agreed that Basel III improves the use of regulatory capital. The least influential factor with a mean of 5.23 is that Basel III enhances the reputation of a bank. The means of the 11 factors of 5.4778 out of 7 indicate that respondents were sufficiently familiar with the expected benefits of the Basel III appli-cation, which confirmed the positive answer to the second question, which is as follows: Are the UAE banks aware of the proposed benefits of implementing Basel III?

Descriptive statistics
In the second category of "Basel III Awareness", the most influential factor with a mean of 5.56 is that most of the respondents were aware that Basel III is a major step forward for capital regulations. The least influential factor was a mean of 5.11, according to which respondents were aware of the Liquidity Coverage Ratio (LCR). The mean of the 11 factors about Basel III awareness of 5.3747 out of 7 clearly shows that the respondents understood the content of Basel III, and this confirmed a positive answer to the third question, which states: Do UAE bank managers understand Basel III components?
Responses to the Basel III implementation effectiveness category show that the most influential factor is the recognition that the bank has fully implemented Basel III (mean 5.56), however, unexpectedly the least influential factor with a mean of 4.77 is a direct indicator of the Basel III interpreting correctly to facilitate effective implementation. The respondents' positive answers to the 10 factors with a mean of 5.1044 reveal that Basel III implementation is effective, which reflects a positive answer to the first question, that states: Have the UAE banks effectively implemented the Basel III regulatory framework?
Regarding the "Availability of Resources" category, Table 4 indicates that the most influential factor is the availability of funds necessary to implement Basel III (mean 5.49), whereas the least influential factor with a mean of 5.18 is the availability of efficient information systems to implement Basel III effectively. However, the mean of the five factors included in this category is 5.2867, which is enough to support the availability of the required resources, which reflects a positive answer to ques-  For Liquidity Coverage Ratio (LCR), the high-quality liquid assets (HQLA) should be equal to or greater than the total net cash outflows over the coming 30 calendar days 5.11 6 One of the Basel III requirements is to raise Tier 1 from 2% risk-weighted assets to a minimum of 7% by 2019 5.12 7 The net stable funding ratio is useful to deal with risk of funding very long-term assets with very short-term liabilities 5.37 The last two categories -"The role of bank management" and "The role of the Central Bank of the UAE" (four and five) -reveal that the mean of the respondents' answers are 5.3810 and 5.4426, respectively. This is to support the positive role of both the bank's management and the Central Bank of the UAE in better implementation of the Basel III accord, which also positively answers the fifth and sixth questions of this research paper.

Testing the study's hypotheses
To test the first five research hypotheses, the regression model 1 was used.
Before examining the contribution of the above-mentioned independent variables to the regression model, a multicollinearity test was conducted to avoid the problem of the strong relation-ship among the independent variables. The correlation table is a measure of how the independent variables are related in this regard, Gogtay and Thatte (2017) present the scale of determining the strength or weakness of the relationship between variables on a scale of +1 to -1 following the "Pearson Correlation Coefficient". Table 5 shows that all the presented independent variables have a positive "r" value and are statistically significant at the 1 percent level over 0 and ranging between 0.310 to 0.701, therefore, the table indicates that there is no multicollinearity problem among the independent variables. Our bank provided training opportunities for the effective implementation of Basel III 5.32 3 The management of our bank continuously monitors the implementation of Basel III 5. 20 4 Our management has consistently organized meetings and discussions on the implementation of Basel III 5.14 5 Our bank provides performance incentives for the best implementation of Basel III 5. 36 6 Management has clearly identified a plan for implementation 5. 70 7 Our bank communicates the objectives of the implementation of Basel   and Role of the UAE Central Bank. This is a relatively low percentage, which raises questions of whether some variables should be considered in the model or some variables should be excluded from the regression model.   Based on the findings obtained, it can be concluded that the respondents were familiar with the expected benefits of Basel III implementation. They were also satisfied with the available resource required to implement Basel III. In addition, the results reveal somehow a positive role of bank management, but it is not strong enough. On the other hand, the participants were not familiar enough with the Basel III agreement, knowing that the needed familiarity can be achieved by both the UAE central bank and bank management, but the results indicate that their role was not strong enough.
To test the final hypothesis 6 -"There is a significant difference between the conventional and Islamic banks regarding the effectiveness of the implementation of Basel III" -a one-way ANOVA test was conducted. Table 7 shows that F-value (calculated value) was higher than the tabulated value and statistically significant at 1 percent. Therefore, hypothesis 6 is confirmed. These results were expected due to the differences between the two types of banks in many aspects. The finding was consistent with the outcomes of Alsharif et al.

CONCLUSION
The objective of this paper is to investigate the factors influencing the implementation of Basel III in UAE banks. While some previous studies from the UAE examined the implementation of the previous Basel Accord (Basel I and II), so far no study has evaluated the effective implementation of Basel III, which was developed in 2010. Therefore, this study is the first of its kind to focus on UAE banks' implementation of Basel III. The attempt was made to answer the research questions (six questions), and the conclusion reached is: The respondents were aware of the expected benefits of the implementation of Basel III, they were familiar with the content of Basel III, they were satisfied with the available resources, but they expressed their concern about the role of bank management and the UAE Central bank. Conclusions are also made based on testing the research hypotheses; the main conclusions in this regard are as follows: There is a positive relationship between the effective application of Basel III and the expected benefits, the available resources and the role of bank management. However, the results indicate a negative relationship between the implementation of Basel III and the support of the Central Bank and the respondents' understanding of Basel III components. The last conclusion of this study is that, as expected, there is a significant difference between the conventional and Islamic banks regarding the effectiveness of Basel III implementation, and this is due to the differences between the two types of banks in many aspects.
Based on the results obtained in this study, some policy implications can be recommended. To facilitate the effective implementation of the Basel Accords in the UAE banking sector by the UAE Central Bank, bank management should promote understanding and awareness of the Basel regulations, expected benefits, and required resources, in addition to revising the implementation procedures by both the Central bank and commercial banks to ensure efficiency and minimize mistakes.