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

  • 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)

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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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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  1. Mingo, John J, 1975. "Regulatory Influence on Bank Capital Investment," Journal of Finance, American Finance Association, vol. 30(4), pages 1111-21, September.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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..
  7. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
  8. Malcolm C. Alfriend, 1988. "International risk-based capital standard: history and explanation," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 28-34.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
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