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Capital Adequacy and Systemic Risk of Banks in India

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  • Mihir Dash

Abstract

This study examines the role of capital adequacy in systemic risk for banks in India. The moderator variables considered for the study include bank size, non-performing assets, leverage, deposits, loans & advances, and investments. A fixed-effects panel regression model was applied, with bank fixed effects and year fixed effects.The study contributes to the literature by proposing the concept of minimum level of capital adequacy for neutral systemic risk, which is the level of capital adequacy for which the systemic risk is non-positive. The results of the study indicate that bank size, non-performing assets, leverage, and loans & advances have a significant impact on the minimum capital adequacy for neutral systemic risk. Further, the results of the study suggest that the role of capital adequacy in systemic impact was different for public sector and private sector banks.The study suggests that, instead of setting a fixed capital adequacy level for all banks, the model can be used to set capital adequacy targets for individual banks with estimates or projections of the bank’s characteristics. This can be used in conjunction with the Basel III framework in order to rationalise capital adequacy targets.

Suggested Citation

  • Mihir Dash, 2020. "Capital Adequacy and Systemic Risk of Banks in India," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 12(1), pages 125-125, December.
    • Handle: RePEc:mth:ajfa88:v:12:y:2020:i:1:p:125
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    References listed on IDEAS

    as
    1. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
    2. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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