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The Relationship Between Risk and Capital: Evidence from Indian Public Sector Banks

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  • Abhiman Das

    (Reserve Bank of India)

  • Saibal Ghosh

    (Reserve Bank of India)

Abstract

The study investigates the relationship between changes in risk and capital in the public sector banking system in India, using both the seemingly unrelated regression (SUR) and the two stage least square (2SLS) method of estimation. Empirical findings establish a negative and significant impact of size on capital, indicating that large banks increased their ratio of capital to risk weighted assets less than other banks. Regulatory pressure is also found to have a negative and significant impact on the ratio of capital to risk weighted assets. Ceteris paribus, adequately capitalised banks decrease their capital ratio more prominently than other banks.

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File URL: http://128.118.178.162/eps/io/papers/0410/0410006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0410006.

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Date of creation: 28 Oct 2004
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Handle: RePEc:wpa:wuwpio:0410006

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Web page: http://128.118.178.162

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  1. 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.
  2. Rime, Bertrand, 2001. "Capital requirements and bank behaviour: Empirical evidence for Switzerland," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 789-805, April.
  3. 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.
  4. Nachane, D M & Narain, Aditya & Ghosh, Saibal & Sahoo, Satyananda, 2001. "Regulating Market Risks in Banks: A Comparison of Alternate Regulatory Regimes," MPRA Paper 17148, University Library of Munich, Germany.
  5. Raj Aggarwal & Kevin T. Jacques, 1998. "Assessing the impact of prompt corrective action on bank capital and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 23-32.
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Cited by:
  1. Saadaoui, Zied, 2008. "Capital standards and banking stability in emerging countries: an empirical approach," MPRA Paper 25464, University Library of Munich, Germany.
  2. Ghosh, Saibal, 2010. "Credit Growth, Bank Soundness and Financial Fragility: Evidence from Indian Banking Sector," MPRA Paper 24715, University Library of Munich, Germany.
  3. Petr Teply & Milan Matejašák, 2007. "Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period," Working Papers IES 2007/23, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007.

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