Bank capital adequacy requirements and risk-taking behavior in Tunisia: a simultaneous equations framework

We extend exiting literature on the efficiency of capital adequacy requirements in reducing risk-taking behaviour of Tunisian commercial banks using a new risk measure: the weighted-assets to total assets. To that end, using a simultaneous equations framework, we reached four main results. First, interaction between capitalization and risk level is negative and not significant, which means that an increase in capital is followed by a decrease in banking risk-taking. Second, Tunisian banks dispose of a weak institutional and regulatory level. Third, the larger the banks are, the more they manage their risk, since large banks have more experience in managing risk levels through diversification. Finally, we found a negative relationship between size and bank capitalization, indicating that the larger bank size is the lower risk level is.