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How Do Bank Capital and Capital Buffer Affect Risk: Empirical Evidence from Large US Commercial Banks

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  • Faisal Abbas

    (School of Accountancy & Finance, University of Lahore, Pakistan)

  • Zahid Irshad Younas

    (National University of Sciences and Technology (NUST), NUST Business School, Islamabad, Pakistan)

Abstract

This research aims to investigate the influence of bank capital, risk-based capital and bank capital buffers on the behaviour of bank risk-taking by applying GMM on the data of US commercial banks ranges from 2002 to 2018. The findings show that bank capital has a positive influence on total risk. However, risk-based capital and capital buffer have a negative impact on total risk. In addition, the results showed that the relationship between bank asset risk and bank capital, risk-based capital and a capital buffer is negative in pre, amid and post-crisis periods. The findings also reveal that the result of bank capital, risk-based capital and a capital buffer is not similar in case of well, adequately, under, significantly under, and critically undercapitalized banks. Our conclusions have numerous implications for policymakers and regulators in the banking sector.

Suggested Citation

  • Faisal Abbas & Zahid Irshad Younas, 2021. "How Do Bank Capital and Capital Buffer Affect Risk: Empirical Evidence from Large US Commercial Banks," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(2), pages 109-131.
    • Handle: RePEc:cbk:journl:v:10:y:2021:i:2:p:109-131
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    4. Ayodeji Michael Obadire & Vusani Moyo & Ntungufhadzeni Freddy Munzhelele, 2022. "Basel III Capital Regulations and Bank Efficiency: Evidence from Selected African Countries," IJFS, MDPI, vol. 10(3), pages 1-22, July.
    5. Doğan, Mesut & Yildiz, Feyyaz, 2023. "Testing the Factors that Determine the Profitability of Banks with a Dynamic Approach: Evidence from Turkey," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 12(1), pages 225-248.

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    More about this item

    Keywords

    Bank capital; Total Risk-Based Bank capital; Capital Buffers; Total Risk and Asset Risk.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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