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

  • George Sheldon
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    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.

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    Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

    Volume (Year): 132 (1996)
    Issue (Month): IV (December)
    Pages: 709-734

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    Handle: RePEc:ses:arsjes:1996-iv-18
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    1. 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.
    2. 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 637-54, May-June.
    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. 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.
    5. Frederick T. Furlong, 1988. "Changes in bank risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar25.
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