Quality of Bank Capital, Competition, and Risk-Taking: Some International Evidence. Issue 12 (26th September 2021)

• Record Type: Journal Article
• Authors: Li, Shaofang
• Is Part Of: Emerging markets finance & trade. Volume 57:Issue 12(2021)
• Page Start: 3455
• Page End: 3488
• Publication Date: 2021-09-26
• Subjects: Tier 1 ratio -- Tier 2 ratio -- Lerner index -- risk-taking; G21 -- G28; Balkan Peninsula -- Commerce -- Periodicals; Balkan Peninsula -- Foreign economic relations -- Periodicals; Europe, Central -- Commerce -- Periodicals; Europe, Central -- Foreign economic relations -- Periodicals; Europe, Eastern -- Commerce -- Periodicals; Europe, Eastern -- Foreign economic relations -- Periodicals; Turkey -- Commerce -- Periodicals; Turkey -- Foreign economic relations -- Periodicals; Asia -- Commerce -- Periodicals; Asia -- Foreign economic relations -- Periodicals; Eurasia -- Commerce -- Periodicals; Eurasia -- Foreign economic relations -- Periodicals; 382.05
• DOI: 10.1080/1540496X.2019.1696189
• Languages: English
• ISSNs: 1540-496X

Abstract

ABSTRACT: This study empirically investigates how bank capital and competitive conditions affect bank risk-taking. Using financial data of 7620 banks on 118 countries from 2001 to 2016, we show that banks with a higher Tier 1 ratio and a lower Tier 2 ratio are lower risk-takers. A bank with greater market power in a banking system tends to reduce its risk-taking activities. Our findings also highlight that the negative relationship between Tier 1 ratio and bank risk are more pronounced in more competitive conditions. During the financial crisis, Tier 1 capital acted as a stable funding source and reduced bank risk, but the evidence on Tier 2 capital shows that a higher Tier 2 ratio results in a higher level of risk and increases bank instability.