Do Banks Shift Asset Portfolios in Compliance to Global Capital Adequacy Regulations?: Evidence from India

Abstract

In this paper we investigated the impact of global capital adequacy norms on the asset portfolios of Indian banks. This research question is important in the Indian context as the Indian banks have adopted global regulatory norms in integration with the already existing domestic policy decisions. We have proposed two alternative modelling frameworks to separate out the impact of Basel capital adequacy regulation on the portfolios of Indian banks. Empirical findings support that implementation of global regulatory norms has brought changes in the portfolio of Indian banks; however, the impact on portfolio change is found to be different for different bank groups. Moreover, response of Indian banks was not same throughout the study period. Response of Indian banks was more pronounced in Basel-I regulation period than Basel-II. Further analysis shows that the credit quality did not push for the shift in asset portfolio while analysing all the bank groups together. However, segregated analysis reveals that asset quality did impact the foreign and old private banks’ portfolios.