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Capital regulation and bank risk‐taking – new global evidence

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  • Roshanthi Dias

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.

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  • Roshanthi Dias, 2021. "Capital regulation and bank risk‐taking – new global evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 847-884, March.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:1:p:847-884
    DOI: 10.1111/acfi.12595
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    1. Haufler, Andreas & Lülfesmann, Christoph, 2022. "Voluntary Equity, Project Risk, and Capital Requirements," Rationality and Competition Discussion Paper Series 357, CRC TRR 190 Rationality and Competition.

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