IDEAS home Printed from https://ideas.repec.org/a/ses/arsjes/1996-iv-18.html
   My bibliography  Save this article

Capital Adequacy Rules and the Risk-Seeking Behavior of Banks: A Firm-Level Analysis

Author

Listed:
  • George Sheldon

Abstract

Economic theory is unclear on the effects of capital regulation on the risk-seeking behavior of banks. This paper attempts to shed light on the issue by examining the impact of the implementation of the guidelines of the 1988 Basle Capital Accord on a large sample of individual banks drawn from the signatory countries. The empirical methodology is based on the call option interpretation of firm equity stemming from BLACK/SCHOLES. The results provide little evidence that the implementation of the Basle guidelines increased the probability of bank failure.

Suggested Citation

  • George Sheldon, 1996. "Capital Adequacy Rules and the Risk-Seeking Behavior of Banks: A Firm-Level Analysis," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 709-734, December.
    • Handle: RePEc:ses:arsjes:1996-iv-18
    as

    Download full text from publisher

    File URL: http://www.sjes.ch/papers/1996-IV-18.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40.
    2. Koehn, Michael & Santomero, Anthony M, 1980. "Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
    3. Steven R. Grenadier & Brian J. Hall, 1995. "Risk-Based Capital Standards and the Riskiness of Bank Portfolios: Credit and Factor Risks," NBER Working Papers 5178, National Bureau of Economic Research, Inc.
    4. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-1233, December.
    5. Frederick T. Furlong, 1988. "Changes in bank risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar25.
    6. Gennotte, Gerard & Pyle, David, 1991. "Capital controls and bank risk," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 805-824, September.
    7. Kahane, Yehuda, 1977. "Capital adequacy and the regulation of financial intermediaries," Journal of Banking & Finance, Elsevier, vol. 1(2), pages 207-218, October.
    8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    9. Steven R. Renadier & Brian J. Hall, 1995. "Risk-Based Capital Standards and the Riskiness of Bank Portfolios: Credit and Factor Risks," Harvard Institute of Economic Research Working Papers 1718, Harvard - Institute of Economic Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kirstein, Roland, 2002. "The new Basle Accord, internal ratings, and the incentives of banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 393-412, May.
    2. G. Dionne & T. M. Harchaoui, 2002. "Banks’ Capital, Securitization and Credit Risk : An Empirical Evidence for Canada," THEMA Working Papers 2002-33, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    3. David VanHoose, 2006. "Bank Behavior Under Capital Regulation: What Does The Academic Literature Tell Us?," NFI Working Papers 2006-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    4. Leonardo Gambacorta & Paolo Emilio Mistrulli, 2003. "Bank Capital and Lending Behaviour: Empirical Evidence for Italy," Temi di discussione (Economic working papers) 486, Bank of Italy, Economic Research and International Relations Area.
    5. Uluc, Arzu & Wieladek, Tomasz, 2015. "Capital requirements, risk shifting and the mortgage market," Bank of England working papers 572, Bank of England.
    6. Franz R. Hahn, 2001. "Macroprudential Financial Regulation and Monetary Policy," WIFO Working Papers 154, WIFO.
    7. Prasad Krishnamurthy, 2014. "Rules, Standards, and Complexity in Capital Regulation," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 273-296.
    8. Dionne, Georges & Harchaoui, Tarek, 2007. "Bank Capital, Securitization and Credit Risk: an Empirical Evidence," MPRA Paper 56693, University Library of Munich, Germany, revised 2007.
    9. Aikman, David & Haldane, Andrew & Hinterschweiger, Marc & Kapadia, Sujit, 2018. "Rethinking financial stability," Bank of England working papers 712, Bank of England.
    10. Jiang Cheng & Mary A. Weiss, 2012. "The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry-wide Factors in Property–Liability Insolvency Prediction," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 723-750, September.
    11. Mérő, Katalin, 2018. "A kockázatalapú bankszabályozás előretörése és visszaszorulása - az ösztönzési struktúrák szerepe [The emergence and decline of risk-based bank regulation the role of incentive structures]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 981-1005.
    12. Bertrand Rime, 2000. "Bank Capital Behaviour: Empirical Evidence for Switzerland," Working Papers 00.05, Swiss National Bank, Study Center Gerzensee.
    13. Stolz, Stéphanie, 2002. "The Relationship between Bank Capital, Risk-Taking, and Capital Regulation: A Review of the Literature," Kiel Working Papers 1105, Kiel Institute for the World Economy (IfW Kiel).
    14. Christian Braun, 2001. "The cost of a guarantee for bank liabilities: revisiting Merton," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 354-366, Bank for International Settlements.
    15. Jiang Cheng & Mary A. Weiss, 2011. "The Regulatory Effect of Risk-Based Capital in Property-Liability Insurance," NFI Working Papers 2011-WP-20, Indiana State University, Scott College of Business, Networks Financial Institute.
    16. Katalin Mérő, 2021. "The ascent and descent of banks’ risk-based capital regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 22(4), pages 308-318, December.
    17. KEQA, Flamur & ERGÜN, Uğur, 2020. "Capital Adequacy Ratios And Compliance With Basel Iii: Evidence From Albania," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 8(1), pages 112-118, October.
    18. M. Kabir Hassan & M. Ershad Hussain, 2006. "Basel II and Bank Credit Risk: Evidence from the Emerging Markets," NFI Working Papers 2006-WP-10, Indiana State University, Scott College of Business, Networks Financial Institute.
    19. Eman Hossain & Jannatul Ferdous & Nahid Farzana, 2012. "Some Imperative Issues and Challenges in Implementing Basel II for Developing Economies with Special Reference to Bangladesh," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 2(4), pages 298-298.
    20. Dionne, Georges & Harchaoui, Tarek M., 2003. "Banks' Capital, Securitization and Credit Risk: An Empirical for Canada," Cahiers de recherche 0311, CIRPEE.
    21. Uluc, Arzu & Wieladek, Tomasz, 2018. "Capital requirements, monetary policy and risk shifting in the mortgage market," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 3-16.
    22. George Sheldon, 1996. "Capital Asset Ratios and Bank Default Probabilities: An International Comparison Based on Accounting Data," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 743-754, December.
    23. Hinterschweiger, Marc & Neumann, Tobias & Saporta, Victoria, 2018. "Risk sensitivity and risk shifting in banking regulation," Bank of England Financial Stability Papers 44, Bank of England.
    24. Rime, Bertrand, 2001. "Capital requirements and bank behaviour: Empirical evidence for Switzerland," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 789-805, April.
    25. Patrick Van Roy, 2005. "The impact of the 1988 Basel Accord on banks' capital ratios and credit risk-taking: an international study," Finance 0509013, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lin, Shu Ling & Penm, Jack H.W. & Gong, Shang-Chi & Chang, Ching-Shan, 2005. "Risk-based capital adequacy in assessing on insolvency-risk and financial performances in Taiwan's banking industry," Research in International Business and Finance, Elsevier, vol. 19(1), pages 111-153, March.
    2. Fegatelli, Paolo, 2010. "The misconception of the option value of deposit insurance and the efficacy of non-risk-based capital requirements in the literature on bank capital regulation," Journal of Financial Stability, Elsevier, vol. 6(2), pages 79-84, June.
    3. David VanHoose, 2006. "Bank Behavior Under Capital Regulation: What Does The Academic Literature Tell Us?," NFI Working Papers 2006-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    4. Frederick T. Furlong & Michael C. Keeley, 1991. "A reexamination of mean-variance analysis of bank capital regulation ( reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 40-48.
    5. Paolo Fegatelli, 2010. "The misconception of the option value of deposit insurance and the efficacy of non-risk-based capital requirements in the literature on bank capital regulation," BCL working papers 46, Central Bank of Luxembourg.
    6. Ernest Dautovic, 2019. "Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard," Cahiers de Recherches Economiques du Département d'économie 19.03, Université de Lausanne, Faculté des HEC, Département d’économie.
    7. Clark, Brian & Ebrahim, Alireza, 2022. "Risk shifting and regulatory arbitrage: Evidence from operational risk," Journal of Financial Stability, Elsevier, vol. 58(C).
    8. Christian Hott, 2022. "Leverage and Risk Taking under Moral Hazard," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(2), pages 167-185, April.
    9. Lara Cathcart & Lina El-Jahel & Ravel Jabbour, 2017. "Basel II: an engine without brakes," Journal of Banking Regulation, Palgrave Macmillan, vol. 18(4), pages 359-374, November.
    10. Ralf Bebenroth & Diemo Dietrich & Uwe Vollmer, 2009. "Bank regulation and supervision in bank-dominated financial systems: a comparison between Japan and Germany," European Journal of Law and Economics, Springer, vol. 27(2), pages 177-209, April.
    11. Smith, Jonathan Acosta & Grill, Michael & Lang, Jan Hannes, 2017. "The leverage ratio, risk-taking and bank stability," Working Paper Series 2079, European Central Bank.
    12. Pamela P. Peterson & Larry D. Wall, 1996. "Banks' responses to binding regulatory capital requirements," Economic Review, Federal Reserve Bank of Atlanta, vol. 80(Mar), pages 1-17.
    13. Paul S. Calem & Rafael Rob, "undated". "The Impact of Capital-Based Regulation on Bank Risk-Taking: A Dynamic Model," Finance and Economics Discussion Series 1996-12, Board of Governors of the Federal Reserve System (U.S.), revised 04 Dec 2019.
    14. Haq, Mamiza & Faff, Robert & Seth, Rama & Mohanty, Sunil, 2014. "Disciplinary tools and bank risk exposure," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 37-64.
    15. Agusman, Agusman & Cullen, Grant S. & Gasbarro, Dominic & Monroe, Gary S. & Zumwalt, J. Kenton, 2014. "Government intervention, bank ownership and risk-taking during the Indonesian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 114-131.
    16. Haq, Mamiza & Heaney, Richard, 2012. "Factors determining European bank risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 696-718.
    17. Jacky So & Jason Z. Wei, 2004. "Deposit Insurance and Forbearance Under Moral Hazard," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 707-735, December.
    18. Thomas Gehrig, 1996. "Market Structure, Monitoring and Capital Adequacy Regulation," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 685-702, December.
    19. Lassaâd Mbarek & Dorra Mezzez Hmaied, 2012. "Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region," Working Papers 679, Economic Research Forum, revised 2012.
    20. Moreira, Fernando, 2022. "Are we living in an illusion? A fresh look at the importance of bank capital in the quest for stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ses:arsjes:1996-iv-18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kurt Schmidheiny (email available below). General contact details of provider: https://edirc.repec.org/data/sgvssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.