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Int. J. Financial Stud. 2016, 4(3), 16; doi:10.3390/ijfs4030016

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

1
International School, East China Jiao Tong University, Nanchang 330013, Jiangxi, China
2
School of Public Administration, China University of Geosciences Wuhan, Wuhan 430074, Hubei, China
3
Research Center for Financial Development and Risk Prevention, Jiangxi University of Finance and Economics, Nanchang 330013, Jiangxi, China
*
Author to whom correspondence should be addressed.
Academic Editor: Nicholas Apergis
Received: 23 March 2016 / Revised: 18 July 2016 / Accepted: 21 July 2016 / Published: 15 August 2016
View Full-Text   |   Download PDF [544 KB, uploaded 15 August 2016]   |  

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. View Full-Text
Keywords: capital regulation; bank risk taking; Basel-II; Basel-III; Pakistan capital regulation; bank risk taking; Basel-II; Basel-III; Pakistan
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Ashraf, B.N.; Arshad, S.; Hu, Y. Capital Regulation and Bank Risk-Taking Behavior: Evidence from Pakistan. Int. J. Financial Stud. 2016, 4, 16.

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