Abstract
Capital regulation has been among the most important tools for regulators to maintain the credibility and stability of the financial systems. However, the question whether higher capital induce banks to take lower risk remains unanswered. This paper examines the effect of capital on bank risk employing a meta-analysis approach, which considers a wide range of empirical papers from 1990 to 2018. We found that the negative effect of bank capital on bank risk, which implies the discipline role of bank capital, is more likely to be reported. However, the reported results are suffered from the publication bias due to the preference for significant estimates and favored results. Our study also shows that the differences in the previous studies’ conclusions are primarily caused by the differences in the study design, particularly the risk and capital measurements; the model specification such as the concern for the dynamic of bank risk behaviors, the endogeneity of the capital and unobserved time fixed effects; along with and the sample characteristics such as the sample size, and whether banks are bank holding companies or located in high-income countries.
Highlights
Three decades have passed since the first introduction of the Basel I Accord in 1988
The capital regulation emphasizes the role of capital in disciplining the bank risk such that it requires banks to hold an adequate amount of capital to cover their risk
We found that the negative effect of bank capital on bank risk, which implies the discipline role of bank capital, is more likely to be reported
Summary
Three decades have passed since the first introduction of the Basel I Accord in 1988. Capital regulation has been among the most important tools for regulators to maintain the credibility and stability of the financial systems. The accord has been regularly revised to enhance the quality of banking supervision and further ensure the credibility and stability of the international banking system. The new framework gives more focus on the role of capital by strengthening the regulatory capital base in both quality and quantity and introducing new minimum requirements for the non-risk-based capital (the leverage ratio), the common equity tier 1 capital, the capital conservation buffers as well as the capital surcharges for global systemically important banks (G-SIB) (BIS 2018). The average risk-weighted regulatory capital ratio raises from 13.3% to 16.95% during the same period (World Bank 2018). While it is favorable for banks to have more capital, there remains debates on whether higher capital induce banks to take lower risk
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