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Banks’ capital regulation and risk: Does bank vary in size? Empirical evidence from Bangladesh

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  • Changjun Zheng

    (School of Management, Huazhong University of Science and Technology (HUST), 1037 Luoyu Road, Hongshan District, Wuhan 430074, P. R. China)

  • Syed Moudud-Ul-Huq

    (School of Management, Huazhong University of Science and Technology (HUST), 1037 Luoyu Road, Hongshan District, Wuhan 430074, P. R. China†Department of Business Administration, Mawlana Bhashani Science and Technology University, Santosh, Tangail-1902, Bangladesh)

Abstract

This paper primarily examines both causality effect of banks’ capital regulation and risk-taking behavior based on generalized methods of moment (GMM) for a dynamic unbalanced panel observation of 32 commercial banks in Bangladesh over the period 2000–2014. The empirical findings of this study suggest that capital regulation has a significant effect on risk-taking behavior, and excessive risks impede the growth of capital ratio as well as the stability. Moreover, from bank-level data, size does not uniformly affect the quantity of capital and risk. Large banks have poor capital ratio and higher inclination to risk than small size counterpart. Small size banks are well managed in capital ratio and risk-taking that glitter their stability through the periods. Besides these effects, corporate governance notably influenced banks to reduce credit risk and enhance stability. Finally, this paper provides some implications for the think tanks and stakeholders of the country.

Suggested Citation

  • Changjun Zheng & Syed Moudud-Ul-Huq, 2017. "Banks’ capital regulation and risk: Does bank vary in size? Empirical evidence from Bangladesh," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-27, June.
    • Handle: RePEc:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500256
    DOI: 10.1142/S2424786317500256
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