Do Basel III Higher Common Equity Capital Requirements Matter for Bank Risk‐taking Behaviour? Lessons from South Africa

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AbstractThis paper examines the role of common equity capital in determining the risk‐taking behaviour of banks in South Africa. Using system GMM, the results show that higher common equity capital is associated with lower bank risk. Additionally, the results show that there is a negative and significant relationship between business cycles and bank risk, while the relationship between bank market power and risk is positive and significant. The findings remain robust after using alternative measures of bank risk. On the whole, this study recommends that an increase in common equity capital should be coupled with control of bank market power to achieve the goal of curtailing excessive risk appetite of banks.