By Stéphanie M. Stolz

ISBN-10: 3540485449

ISBN-13: 9783540485445

ISBN-10: 3540485457

ISBN-13: 9783540485452

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?

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Extra info for Bank Capital and Risk-Taking: The Impact of Capital Regulation, Charter Value, and the Business Cycle

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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.

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Bank Capital and Risk-Taking: The Impact of Capital Regulation, Charter Value, and the Business Cycle by Stéphanie M. Stolz


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