The role of capital regulation on bank performance

Abstract

In this paper, we analyse the impact of capital regulation on performance and the risk–taking of 30 European banks. We used a technique of panel data over the period 2004–2009. Results show that capital regulation measured by the ratio capital has a negative and statistically significant risk–taking impact. In addition, regulatory pressure is negatively related to financial performance and positively to bank risk–taking. As a result, a negative and statistically significant relationship was confirmed between credit risk and the return on assets. The results of this study show that both mechanisms 'minimum capital requirements' and 'regulatory pressure' are alternative mechanisms. These mechanisms play a major role in the banks' governance and are the key factors of their performance. Hence, equity strengthening would help solve many of the identified problems and therefore strengthen the stability of the financial system without adversely affecting the banking functioning, their value, their performance or even their shareholders.