Bank Capital, Risk-Taking and Stability: How Valid are the Relationships Assumed in Capital Regulation?

Regulatory capital and bank risk-resilience amid the Covid-19 pandemic: How are the Basel reforms faring?

“…Furthermore, we employ an event study approach rather than the conventional association study approach that is commonly used in the literature (e.g., Abboud et al., 2021 ; Altunbas et al., 2007 , 2012 ; Berger and Bouwman, 2013 ; Kanga et al., 2020 ). The latter approach is relatively less effective in addressing endogeneity concerns related to correlated omitted variables and feedback effect running from bank risk to capital ( Bostandzic et al., 2022 ; Januzzi and Moreira, 2022 ; Kanga et al., 2020 ), thus casting doubts on whether the results documented in this regard could be interpreted as causal ( Bostandzic et al., 2022 ; Moreira, 2022 ). Our study thus adds depth to the existing literature by exploiting the unique setting of the Covid-19 pandemic as a quasi-natural experiment, which better alleviates the potential endogeneity between banks’ capital and insolvency risk ( Moreira, 2022 ).…”