By Stéphanie M. Stolz
The year-long consultations on Basel II reflect the overseas approval for capital requisites as a regulatory software. but, the effect of capital requisites on banks' habit isn't really absolutely understood. the purpose of this examine is to give a contribution to this knowing by means of answering the next questions: How do banks modify capital and danger after a rise in capital standards? How do banks alter their regulatory capital buffer over the enterprise cycle? And, what's the impression of banks' constitution price at the regulatory capital buffer?
Read Online or Download Bank Capital and Risk-Taking: The Impact of Capital Regulation, Charter Value, and the Business Cycle PDF
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Extra info for Bank Capital and Risk-Taking: The Impact of Capital Regulation, Charter Value, and the Business Cycle
28 Chapter 2 Theoretical Literature creasing their risk-weighted assets. Hence, taking as the null hypothesis that banks with low capital buffers decrease their risk-weighted assets in a business cycle downturn by the same amount as banks with higher capital buffers, I can state my hypotheses as follows: H7: During business cycle downturns, banks with low capital buffers increase their risk-weighted assets by less than banks with higher capital buffers. H#: During business cycle downturns, banks with low capital buffers increase their risk-weighted assets by more than banks with higher capital buffers.
In contrast, Koehn and Santomero (1980) argue that flat capital requirements may even increase risk-taking incentives instead of lowering them: as the forced increase in expensive capital financing reduces a bank's expected return, the bank, in turn, tries to increase its profitability by investing in riskier assets. Other authors show that risk-based capital requirements can, however, eliminate risk-taking incentives if risk weights are correctly chosen (Sharpe 1978; Kim and Santomero 1988; Rochet 1992).
The null hypothesis is that of nonstationarity (1(1) behavior). The test results are given in Table 1. 000* * * Notes: The null hypothesis of the Levin-Lin-Chu Panel Unit-Root Test is that there is a common unit-root process for all individual banks. *** indicates statistical significance at the 1 percent level. 38 Chapter 3 Capital and Risk Adjustments The LLC test rejects the hypothesis of a common unit root both for CAP and for RISK. Interestingly, it does not reject a common unit root for the absolute capital buffer, BUF, although CAP and RISK are the determinants thereof.
Bank Capital and Risk-Taking: The Impact of Capital Regulation, Charter Value, and the Business Cycle by Stéphanie M. Stolz
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