Capital Regulation and Bank Risk-Taking Behavior: Evidence from Pakistan

Journal article


Ashraf, B., Arshad, S. and Hu, Y. (2016). Capital Regulation and Bank Risk-Taking Behavior: Evidence from Pakistan. International Journal of Financial Studies. 4 (3), p. 16. https://doi.org/10.3390/ijfs4030016
AuthorsAshraf, B., Arshad, S. and Hu, Y.
Abstract

In response to the global financial crisis of 2007–2009, risk-based capital requirements have been reinforced in the new Basel III Accord to counter excessive bank risk-taking behavior. However, prior theoretical as well as empirical literature that studies the impact of risk-based capital requirements on bank risk-taking behavior is inconclusive. The primary purpose of this paper is to examine the impact of risk-based capital requirements on bank risk-taking behavior, using a panel dataset of 21 listed commercial banks of Pakistan over the period 2005–2012. Purely regulatory measures of bank capital, capital adequacy ratio, and bank assets portfolio risk, risk-weighted assets to total assets ratio, are used for the main analysis. Recently developed small N panel methods (bias corrected least squares dummy variable (LSDVC) method and system GMM method with instruments collapse option) are used to control for panel fixed effects, dynamic dependent variables, and endogenous independent variables. Overall, the results suggest that commercial banks have reduced assets portfolio risk in response to stringent risk-based capital requirements. Results also confirm that all banks having risk-based capital ratios either lower or higher than the regulatory required limits, have decreased portfolio risk in response to stringent risk-based capital requirements. The results are robust to alternative proxies of bank risk-taking, alternative estimation methods, and alternative samples.

Year2016
JournalInternational Journal of Financial Studies
Journal citation4 (3), p. 16
PublisherMDPI
ISSN2227-7072
Digital Object Identifier (DOI)https://doi.org/10.3390/ijfs4030016
Publication dates
Online21 Jul 2016
Publication process dates
Accepted16 Aug 2016
Deposited02 Nov 2022
Publisher's version
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Open
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