Capital regulation and bank risk‐taking – new global evidence. (8th January 2020)

• Record Type: Journal Article
• Authors: Dias, Roshanthi
• Is Part Of: Accounting and finance. Volume 61:Number 1(2021)
• Page Start: 847
• Page End: 884
• Publication Date: 2020-01-08
• Subjects: Bank risk‐taking -- Capital regulations -- Commercial banks -- Tier 1 capital; Accounting -- Periodicals; Finance -- Periodicals; 657.05
• DOI: 10.1111/acfi.12595
• Languages: English
• ISSNs: 0810-5391

Abstract

Abstract: This study investigates the link between capital regulation and bank risk‐taking. Using a sample of over 1, 800 banks in 135 countries, I find that the relationship between capital regulation and bank risk‐taking (measured by z‐score ) is an inverse 'U' shape. That is, as capital ratios increase, a bank will take less risk initially, then more risk. These results are robust to numerous additional tests, including estimation methods. I also find that more stringent regulations mitigate the effect of higher capital on lowering bank risk‐taking. Increased capital requirements, even when risk‐based, induce risk‐taking at higher levels, irrespective of whether banks are well‐ or under‐capitalised.