Abstract
This paper reviews theoretical and empirical studies on the way that capital requirements influences bank capital structure, risk-taking and lending. Deposit insurance, when not fairly priced, give incentives for excessive risk-taking. To alleviate this problem regulator found as necessary the use of certain requirements such as capital requirement. Based on this, it is obligatory for banks to hold more capital that means to have more of their own funds at risk. The theoretical literature related to the way how capital regulation influences banks on their decision for the capital structure and portfolio risk says more than that. Capital requirements were supposed to enhance financial stability and economic growth. Regarding economic growth, the effects of capital requirements can influence it directly or indirectly. Changes that capital requirements bring to the credit supply, costs of capital and to the bank asset risks affect indirectly the economic growth. Higher capital requirements reduce credit supply and decreases credit demand which in turn may slow down economic growth. Nevertheless, well-capitalized banks make provision of credit more consistent and enhance financial stability. Suggestions given from the theoretical literature and lessons learned from empirical researches are going to be used in analyzing effects of bank capital requirements on the relation between efficiency, capital and risk-taking in Albanian banking system DOI: 10.5901/mjss.2016.v7n1p340
Highlights
During 1970s banking sector has been subject of deregulation
Conclusions on the link between them result from researches focused on indirect effects of capital regulation, which in turn can have an impact on economic growth
Theoretical studies are not conclusive on the effect that more stringent capital requirements have on bank efficiency
Summary
During 1970s banking sector has been subject of deregulation. This includes taking off the interest rate ceiling, the restrictions on lending, on the kind of financial activities that they could be involved. Even though at the beginning the impact of deregulation influenced positively the performance of real economy at the same time facts tells us that the banking crises have been increased Facing this situation, regulators found as necessary the use of certain requirements to compete with free banking. The paper is organized as follow: Session 2 gives a summary of theoretical and empirical literature on the efficiency of capital regulation and effects that might have capital regulation on the bank’s decision.
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