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Capital Regulation and Credit Risk Taking : Empirical Evidence from Banks in Emerging Market Economies

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  • Christophe Godlewski

    (LaRGE, Institut d'Etudes Politiques, Université Robert Schuman, Strasbourg 3)

Abstract

The primary purpose of this article is to investigate the relationship between bank capital and credit risk taking in emerging market economies. We also investigate the influence of several regulatory, institutional and legal features on the relationship between risk and capital. We apply a simultaneous equations framework following Shrieves and Dahl (1992) and Jacques and Nigro (1997). Our results corroborate the existing findings for US and other industrial economies, putting forward the impact of capital regulation on banks’ behavior. We also show empirical evidence on the role of the regulatory, institutional and legal environment in driving bank capitalization and credit risk taking behavior in emerging market economies.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0409030.

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Date of creation: 08 Sep 2004
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Handle: RePEc:wpa:wuwpfi:0409030

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Keywords: bank capital and risk taking; bank regulation; emerging market economies; regulatory; institutional and legal environment;

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References

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  1. Rojas-Suarez, Liliana, 2002. "Can international capital standards strengthen banks in emerging markets?," Journal of Financial Transformation, Capco Institute, vol. 5, pages 51-63.
  2. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  3. 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.
  4. Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements.
  5. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
  6. Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Keeley, Michael C. & Furlong, Frederick T., 1990. "A reexamination of mean-variance analysis of bank capital regulation," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 69-84, March.
  8. Jeitschko, Thomas D. & Jeung, Shin Dong, 2005. "Incentives for risk-taking in banking - A unified approach," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 759-777, March.
  9. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
  10. Christophe Godlewski, 2004. "Le Rôle de l'Environnement Réglementaire, Légal et Institutionnel dans la Défaillance des Banques : Le Cas des Pays Emergents," Finance 0409021, EconWPA.
  11. Klapper, Leora F. & Love, Inessa, 2002. "Corporate governance, investor protection, and performance in emerging markets," Policy Research Working Paper Series 2818, The World Bank.
  12. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
  13. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  14. Qaizar Hussain & Clas Wihlborg, 1999. "Corporate Insolvency Procedures and Bank Behavior," IMF Working Papers 99/135, International Monetary Fund.
  15. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
  16. 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.
  17. 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.
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Citations

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Cited by:
  1. Jokipii, Terhi & Milne, Alistair, 2011. "Bank capital buffer and risk adjustment decisions," Journal of Financial Stability, Elsevier, vol. 7(3), pages 165-178, August.
  2. Bhaumik, Sumon Kumar & Piesse, Jenifer, 2008. "Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector," Economic Systems, Elsevier, vol. 32(2), pages 177-196, June.
  3. Ahlem Selma Messai & Fathi Jouini, 2013. "Micro and Macro Determinants of Non-performing Loan," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 852 - 860.

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