The effect of stricter capital regulation on banks’ risk‐taking: Theory and evidence

Lundtofte, Frederik; Nielsen, Caren Yinxia

doi:10.1111/eufm.12205

Cited by 9 publications

(8 citation statements)

References 39 publications

(63 reference statements)

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“…A large number of studies found the capital adequacy regulation as a cause of excessive risk-taking (Lundtofte and Nielsen, 2018; Camara et al , 2013; Murphy, 2013; Matejasak et al , 2009; Hussain and Hassan, 2005; Diamond and Rajan, 2000; Blum, 1999; Barber et al , 1996; Shrieves and Dhal, 1992). These studies observed that regulation allows banks to increase riskier investment with increased capital level and vice versa.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Studies finding positive relationship between capital regulation and bank risk-taking cited regulatory restriction (Lundtofte and Nielsen, 2018; Bouheni, 2014; Murphy, 2013; Blum, 1999); lower rate of return (Barber et al , 1996; Koehn and Santomero, 1980); riskier portfolio selection (Lundtofte and Nielsen, 2018; Berger and Bouwman, 2013); and deposit insurance system (Bouheni, 2014; Shehzad et al , 2010; Demirguç-Kunt and Detragiache, 2002) for the underlying reasons. Other studies observing negative relationship among capital regulation and bank risk come up with the reasons such as bank size (Agoraki et al , 2011; Hakenes and Schnabel, 2011), income diversification (Ghosh, 2014; Hsieh et al , 2013) and strict regulation.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Even though the regulation is implemented to strengthen the banking system, existing empirical evidence advocates the negative effect of regulatory pressure hypothesis to encourage excessive risk-taking in the banking industry (Lundtofte and Nielsen, 2018; Bouheni, 2014; Camara et al , 2013; Murphy, 2013; Matejasak et al , 2009; Hussain and Hassan, 2005; Diamond and Rajan, 2000; Blum, 1999; Shrieves and Dhal, 1992).…”

Section: Introductionmentioning

confidence: 99%

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Capital regulation and ownership structure on bank risk

Siddika

Haron

2019

JFRC

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Purpose This paper aims to examine the impact of capital regulation, ownership structure and the degree of ownership concentration on the risk of commercial banks. Design/methodology/approach This study uses a sample of 565 commercial banks from 52 countries over the period of 2011-2015. A dynamic panel data model estimation using the maximum likelihood with structural equation modelling (SEM) was followed considering the panel nature of this study. Findings The study found that the increase of capital ratio decreases bank risk and the regulatory pressure increases the risk-taking of the bank. No statistically significant relationship between banks’ ownership structure and risk-taking was found. The concentration of ownership was found negatively associated with bank risk. Finally, the study found that in the long term, bank increases the capital level that decreases the default risk. Originality/value This study presents an empirical analysis on the global banking system focusing on the Basel Committee member and non-member countries that reflect the implementation of Basel II and Basel III. Therefore, it helps fill the gap in the banking literature on the effect of recent changes in the capital regulation on bank risk. Maximum likelihood with SEM addresses the issue of endogeneity, efficiency and time-invariant variables. Moreover, this study measures the risk by different proxy variables that address total, default and liquidity risks of the banks. Examining from a different perspective of risk makes the study more robust.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Capital regulation and ownership structure on bank risk

Siddika

Haron

2019

JFRC

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“…Since banks typically finance long term assets through short term borrowings, this increases the probability that the creditors may not roll over the financing creating incentives for increased risk-taking. In a similar vein, Lundtofte and Nielsen (2019) find that banks increase the proportion of high risk-high earnings assets in their portfolio to offset higher costs imposed by stricter regulations.…”

Section: Sacord and Bank Risk Takingmentioning

confidence: 85%

The impact of regulations on compliance costs, risk-taking, and reporting quality of the EU banks

Poshakwale

Aghanya

Agarwal

2020

International Review of Financial Analysis

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The paper examines how the Statutory Audit and Corporate Reporting Directives (SACORD) affect the compliance costs, risk taking and quality of financial reporting of the EU banks. Using a natural experiment, we find that post SACORD, both compliance costs and risk taking increase significantly. However, the implementation of additional regulations seems to be effective in terms of improved quality of financial reporting. When we analyse the impact by size, we find that smaller banks face disproportionately higher increase in compliance costs while larger banks seem to engage in greater risk taking.

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“…Therefore, the academic literature has focused a great deal of attention on the effects of regulation on the banking sector (e.g. Baker & Wurgler, 2015; Bouwman, Hu, & Johnson, 2018; Lundtofte & Nielsen, 2019; Thakor, 2018).…”

Section: Introductionmentioning

confidence: 99%

Economies or diseconomies of scope in the EU banking industry?

Beccalli

Rossi

2020

Euro Fin Management

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Banks’ business models are assumed to affect efficiency, as documented in the banking supervisory priorities of the European Union (EU) for 2016–2018 and the 2014 structural reform proposal for the EU banking sector. We investigate evidence of economies and diseconomies of scope for the EU. We find cost economies of scope and revenue diseconomies of scope, resulting in profit diseconomies of scope. Separating commercial from investment activities generates economic inefficiencies on costs but efficiencies on revenues and profits. Economies of scope are affected by bank size, liquidity, competition in the banking industry, and the European sovereign debt crisis.

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The effect of stricter capital regulation on banks’ risk‐taking: Theory and evidence

Cited by 9 publications

References 39 publications

Capital regulation and ownership structure on bank risk

Capital regulation and ownership structure on bank risk

The impact of regulations on compliance costs, risk-taking, and reporting quality of the EU banks

Economies or diseconomies of scope in the EU banking industry?

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