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Capital requirements and bank behaviour: an empirical analysis of Indian public sector banks

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Author Info

  • Saibal Ghosh

    (Department of Economics Analysis and Policy, Reserve Bank of India, Mumbai, India)

  • D. M. Nachane

    (Department of Economics, Vidyanagari, Mumbai, India)

  • Aditya Narain

    (Department of Banking Supervision, Reserve Bank of India, Mumbai, India)

  • Satyananda Sahoo

    (Department of Economics Analysis and Policy, Reserve Bank of India, Mumbai, India)

Abstract

Consequent upon the introduction of prudential norms as an integral part of financial sector reforms, the present paper investigates the relationship between changes in risk and capital in the Indian banking sector. A dynamic, multivariate panel regression model is formulated wherein changes in capital ratio depend on its lagged value, a range of conditioning variables and regulatory dummies. Our analysis reveals that: (i) the regulatory framework needs to be designed to encourage individual banks to maintain higher than stipulated capital levels to reflect their differential risk profiles; and (ii) there is no conclusive evidence of risk aversion among Indian banks. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jid.947
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

Volume (Year): 15 (2003)
Issue (Month): 2 ()
Pages: 145-156

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Handle: RePEc:wly:jintdv:v:15:y:2003:i:2:p:145-156

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Web page: http://www3.interscience.wiley.com/journal/5102/home

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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
  3. Mingo, John J, 1975. "Regulatory Influence on Bank Capital Investment," Journal of Finance, American Finance Association, vol. 30(4), pages 1111-21, September.
  4. Malcolm C. Alfriend, 1988. "International risk-based capital standard: history and explanation," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 28-34.
  5. Peltzman, Sam, 1970. "Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 1-26, Jan.-Feb..
  6. Tolga Ediz & Ian Michael & William Perraudin, 1998. "The impact of capital requirements on U.K. bank behaviour," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 15-22.
  7. Jacques, Kevin & Nigro, Peter, 1997. "Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach," Journal of Economics and Business, Elsevier, vol. 49(6), pages 533-547.
  8. Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
  9. Avery, Robert B. & Berger, Allen N., 1991. "Risk-based capital and deposit insurance reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 847-874, September.
  10. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
  11. William R. Keeton, 1989. "The new risk-based capital plan for commercial banks," Economic Review, Federal Reserve Bank of Kansas City, issue Dec, pages 40-60.
  12. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
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Citations

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Cited by:
  1. Lee, Tung-Hao & Chih, Shu-Hwa, 2013. "Does financial regulation affect the profit efficiency and risk of banks? Evidence from China's commercial banks," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 705-724.
  2. Michael J. Skully & Rubi Ahmad & M. Ariff, 2009. "The Determinants of Bank Capital Ratios in a Developing Economy," CARF F-Series CARF-F-147, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. Ghosh, Saibal & Das, Abhiman, 2006. "Depositor discipline in Indian banking: Separating facts from folklore," MPRA Paper 17427, University Library of Munich, Germany.
  4. Nachane, D M & Ray, Partha & Ghosh, Saibal, 2005. "The new Basel capital accord: Rationale, design and tentative implications for India," MPRA Paper 17426, University Library of Munich, Germany.
  5. Saibal Ghosh, 2008. "Capital requirements, bank behavior and monetary policy: A theoretical analysis with an empirical application to India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 43(2), pages 205-227, December.
  6. Ahmad Aref Almazari, 2013. "Capital Adequacy, Cost Income Ratio and the Performance of Saudi Banks (2007-2011)," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 284-293, October.
  7. Nachane, Dilip & Ghosh, Saibal & Ray, Partha, 2006. "Basel II and bank lending behavior: Some likely implications for monetary policy in India," MPRA Paper 3840, University Library of Munich, Germany.
  8. Nachane, Dilip & Ghosh, Saibal & Ray, Partha, 2006. "Basel II and bank lending behavior: some likely implications for monetary policy," MPRA Paper 3841, University Library of Munich, Germany.
  9. Ghosh, Saibal, 2013. "Macroprudential Regulation and Bank Performance: Evidence from India," MPRA Paper 51226, University Library of Munich, Germany.
  10. Ghosh, Saibal & Das, Abhiman, 2005. "Market Discipline, Capital Adequacy and Bank Behaviour: Theory and Indian Evidence," MPRA Paper 17398, University Library of Munich, Germany.

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