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The Relationship between Risk and Capital in Swiss commercial Banks: A Panel Study

Author

Listed:
  • Robert Bichsel

    (Swiss National Bank)

  • Jürg Blum

    (Swiss National Bank)

Abstract

In this paper we investigate the relationship between changes in risk and changes in leverage for a panel of Swiss banks. Using market data for risk and both accounting and market data for capital over the period between 1990 and 2002, we find a positive correlation between changes in capital and changes in risk, i.e. higher levels of capital are associated with higher levels of risk. Despite this positive correlation, however, we do not find significant relationship between the default probability and the capital ratio.

Suggested Citation

  • Robert Bichsel & Jürg Blum, 2002. "The Relationship between Risk and Capital in Swiss commercial Banks: A Panel Study," Working Papers 02.04, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:0204
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    1. Simone Auer & Maja Ganarin & Pascal Towbin, 2017. "International Banking and Cross-Border Effects of Regulation: Lessons from Switzerland," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 65-93, March.
    2. Awdeh, Ali & Hamadi, Hassan, 2011. "How Do Banks Set their Capital?," MPRA Paper 119116, University Library of Munich, Germany.
    3. Martynova, Natalya & Ratnovski, Lev & Vlahu, Razvan, 2020. "Bank profitability, leverage constraints, and risk-taking," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    4. Enrico Perotti & Lev Ratnovski & Razvan Vlahu, 2011. "Capital Regulation and Tail Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 123-163, December.
    5. Wahyoe Soedarmono & Philippe Rous & Amine Tarazi, 2011. "Bank Capital and Self-Interested Managers: Evidence from Indonesia," Working Papers hal-00918584, HAL.
    6. Sanae Solhi & Abdelhaq Mehdi, 2012. "Prevention Du Risque De Defaillance Des Banques De La Region Mena: Analyse Par Equations Simultanees En Donnees De Panel," Working Papers 693, Economic Research Forum, revised 2012.
    7. Jokipii, Terhi & Monnin, Pierre, 2013. "The impact of banking sector stability on the real economy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1-16.
    8. Maya El Hourani & Gérard Mondello, 2019. "The Impact of Bank Capital and Institutional Quality on Lending: Empirical Evidence from the MENA Region," GREDEG Working Papers 2019-34, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    9. Duran, Miguel A. & Lozano-Vivas, Ana, 2014. "Risk shifting in the US banking system: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 64-74.
    10. Robert J. Powell & Duc H. Vo, 2020. "A Comprehensive Stability Indicator for Banks," Risks, MDPI, vol. 8(1), pages 1-15, February.
    11. Hu, Jin-Li & Yu, Hsueh-E, 2014. "Risk management in life insurance companies: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 185-199.
    12. Doris Neuberger & Roger Rissi, 2014. "Macroprudential Banking Regulation: Does One Size Fit All?," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(1), pages 5-28.
    13. Weber, Martin & Kleff, Volker, 2003. "How Do Banks Determine Capital? Empirical Evidence for Germany," ZEW Discussion Papers 03-66, ZEW - Leibniz Centre for European Economic Research.
    14. Abou-El-Sood, Heba, 2016. "Are regulatory capital adequacy ratios good indicators of bank failure? Evidence from US banks," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 292-302.
    15. Natalya Martynova & Mr. Lev Ratnovski & Mr. Razvan Vlahu, 2015. "Bank Profitability and Risk-Taking," IMF Working Papers 2015/249, International Monetary Fund.
    16. Francisco Jareno, 2008. "Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3159-3171.
    17. Anginer, Deniz & Demirguc-Kunt, Asli, 2014. "Bank capital and systemic stability," Policy Research Working Paper Series 6948, The World Bank.
    18. Enrico Perotti & Lev Ratnovski & Razvan Vlahu, 2011. "Capital Regulation and Tail Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 123-163, December.
    19. Duran, Miguel A. & Lozano-Vivas, Ana, 2015. "Moral hazard and the financial structure of banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 28-40.
    20. Damilola Oyetade & Adefemi A. Obalade & Paul-Francois Muzindutsi, 2022. "The Impact of Changes in Basel Capital Requirements on the Resilience of African Commercial Banks," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 69(1), pages 111-132, January.
    21. Petr Teply & Milan Matejašák, 2007. "Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period," Working Papers IES 2007/23, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007.
    22. Beutler, Toni & Bichsel, Robert & Bruhin, Adrian & Danton, Jayson, 2020. "The impact of interest rate risk on bank lending," Journal of Banking & Finance, Elsevier, vol. 115(C).
    23. Ahadifar, Alireza & Karimi Takanlo, Zahra & ranjpour, Reza & Haghighat, Jafar, 2021. "Investigation of Factors Affecting Banking Leverage in Selected Iranian Banks (Random-Coefficients Approach)," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 16(1), pages 21-42, March.
    24. Natalya Martynova & Lev Ratnovski & Razvan Vlahu, 2014. "Franchise value and risk-taking in modern banks," DNB Working Papers 430, Netherlands Central Bank, Research Department.
    25. Rahman, Mohammed Mizanur & Zheng, Changjun & Ashraf, Badar Nadeem & Rahman, Mohammad Morshedur, 2018. "Capital requirements, the cost of financial intermediation and bank risk-taking: Empirical evidence from Bangladesh," Research in International Business and Finance, Elsevier, vol. 44(C), pages 488-503.

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