Effects Of Capital Requirements Research Articles

The Effects of Capital Requirements on Good and Bad Risk-Taking

Abstract We study capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. A novel general equilibrium channel that operates through firms deposits mitigates the cost of increasing capital requirements. In the calibrated model, (a) the optimal capital requirement is 7.3 percentage points higher than in a comparable model in which all the deposits are held by households, and (b) setting the capital requirement higher than the true optimum is not as costly as one would gauge from the comparable model. We also provide some independent evidence that supports our novel channel.

Pengaruh Capital Requirements, Kepemilikan Manajerial Terhadap Manajemen Laba yang Dimoderasi Oleh Mekanisme Tata Kelola

The purpose of this study is to examine the effect of capital requirements on earnings management as well as the effect of managerial ownership on earnings management, besides that this study also wants to examine the governance mechanisms proxied by independent commissioners whether they are able to moderate the effect of each of these variables on earnings management. The sample used was 33 banking companies listed on the IDX for the 2015-2019 period, using panel data and processed using the EViews 9 software. The results of the research show that capital adequacy has a positive effect on earnings management, and governance mechanisms moderate the positive relationship between capital adequacy. to earnings management

Capital requirements, risk-taking and welfare in a growing economy

The effects of capital requirements on risk-taking and welfare are studied in an overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky, more productive but socially inefficient, technology. Bank risk-taking is endogenous. As a result of a skin in the game effect—motivated either as an aggregate externality, or as the outcome of the optimal choice of monitoring effort by individual banks—default risk is inversely related to the capital adequacy ratio. Numerical simulations show that in an equilibrium where banks extend both safe and risky loans, the skin in the game effect must be sufficiently strong for a welfare-maximizing regulatory policy to exist. These results remain qualitatively similar with endogenous monitoring costs and a strong effect of monitoring on entrepreneurial moral hazard. However, numerical experiments also suggest that the optimal capital adequacy ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.

Managerial Protections, Capital Structure, and Investment: Theory and Evidence

We introduce a model to illustrate how the effect of capital requirements on bank lending can qualitatively depend on the extent of managerial protections against shareholder actions. Protections encourage managers to pursue unprofitable projects. Protected managers can still be disciplined by debt. If debt is constrained by capital requirements, then a higher level of investment can serve as a partial substitute. Capital requirements can therefore spur increased investment for firms with managerial protections. Empirically, bank stress-testing after the 2008 financial crisis led to an increase in lending for banks with strong protections compared to banks with weak protections.

Determinants of net interest margin: the effect of capital requirements and deposit insurance scheme

ABSTRACTThis paper analyzes the determinants of net interest margin with a focus on the impact of capital regulation and deposit insurance. We extend the Ho and Saunders (1981) family of models to explicitly include both capital requirement and the deposit insurance premium as determinants of net interest margin. The model predicts that the higher the capital requirements and deposit insurance premium, the higher banks’ interest rates will be. We test the theoretical model using panel data for OECD countries between 2000 and 2014. Our results support the positive relationship between both the capital requirement and the deposit insurance premium on interest margins. The most important determinants of the net interest margin are implicit payments, efficiency, average operating costs, the intensity of competition, the deposit insurance premium and capital stringency.

Bank procyclicality, business cycles and capital requirements

The present work seeks to rationalize the procyclical movements of credit, deposits and bank leverage, basic elements that justify the existence of macroprudential policies, and the effects of capital requirements on the business cycle and financial stability. For this purpose, we use an extension of the theoretical framework of Bernanke et al. [Handbook of Macroeconomics, Elsevier, New York, pp 1341–1393, 1999], which includes the presence of banks through the existence of a second asymmetry between banks and depositors. This extension allows us to understand the role of bank capital on the business cycle and, in this way, how credit channels and financial stability are affected by the inclusion of capital requirements as has been proposed in the Basel III Agreement. The results suggest that capital requirements act as a significant financial accelerator in the presence of productivity and monetary shocks. In addition, during expansions, banking capital regulation helps not only the real part of the economy perform better but also the financial part, through lesser leverage for entrepreneurs and banks. Our results also suggest that an asymmetric regulation constraint throughout the business cycle is preferable to a fixed one.

The Effects of Capital Requirements on Good and Bad Risk-Taking

We study optimal capital requirement regulation in a dynamic quantitative model in which deposits facilitate real economic activity and thus the value of deposits is microfounded. We identify a novel general equilibrium effect that drives a wedge between the private value of deposits (i.e., the value to price-taking agents, measured by the deposit premium) and the social value of deposits (i.e., the value that matters for regulation). The wedge reduces the social value of deposits, and as a result, the optimal capital requirement is substantially higher than in comparable models in the literature. Nonetheless, even when the marginal social value of deposits is very low, setting capital requirements too high is suboptimal.

Do Stricter Capital Requirements Reduce Systemic Risk? Evidence From a Quasi-Natural Experiment

In this paper I use a quasi-natural experiment - the EBA capital exercise in 2011 - to identify the causal effects of increased capital requirements on the solvency of banks. I focus on market-based measures of solvency, such as market-based leverage, in addition to estimates of banks' systemic risk. My main finding is that market-based measures of bank solvency decreases in response to increased capital requirements. An important contributing factor to this is the adverse effects of capital requirements on the market value of bank equity capital. In order to interpret these findings, I set up a simple model to analyze how capital requirements affect market-based solvency measures for banks. I show that capital requirements can decrease the market value of banks' capital and therefore be counterproductive. I show that this effect is larger for banks that initially are low-capitalized, and provide empirical evidence in support of this. Finally, I discuss the implications of my findings for the design of policies aimed at recapitalizing the financial system.

Market entry barriers and firm performance: higher-order quadratic interaction effects of capital requirements and firm competence

Barriers to entry prevent new market entrants from entering markets while protecting incumbent firms. Previous researches indicate that there is relationship between barriers and firm performance. Most of the previous studies are broad and explain barriers and firm performance relationship in generic terms. This research examines the interrelationships of barriers to market entry, capital requirements, business environment, competitive advantage of incumbent firms, and firm competence on firm performance. Interaction effects among barriers to entry on firm performance have not been studied before. The study utilises the 'resource based view' as a theoretical framework in support of hypotheses. The study supports the higher-order quadratic interaction effects of: 1) a strong positive effect of competitive advantage and capital requirements on firm performance; 2) a moderate negative effect of business environment and capital requirements on firm performance.

The Effects of Capital Requirements on Good and Bad Risk Taking

We study optimal capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. Firms hold deposits for precautionary reasons and to facilitate the acquisition of production inputs. Our theoretical analysis identifies a novel general equilibrium channel that operates through firms’ deposits and mitigates the cost of increasing capital requirements. We calibrate our model and find that the optimal capital requirement is 18.7% but only 13.6% in a comparable model in which only households hold deposits. Our novel channel accounts for most of the difference.

Financial Stability and Prudential Requirements in Tunisian Case

This paper has as object the study of the effects of prudential regulation on the financial stability. Using panel data, we select a sample of Tunisian bank over the period 1996-2014. The findings show the significant and negative effect of capital requirements.

Bank Capital Requirements and Balance Sheet Management Practices: Has the Relationship Changed after the Crisis?

We use a proprietary database of individual UK capital requirements spanning 1989 to 2013 and panel regression techniques to evaluate whether the effects of capital requirements on banks’ balance sheet adjustments changed after the 2008–09 financial crisis. We find that after the crisis banks placed more emphasis on overall asset deleveraging. A 1 percentage point increase in capital requirements lowered total asset growth by 14 basis points before the crisis and 20 basis points after the crisis. We also find evidence of a structural change in banks’ capital management practices, with banks increasing better-quality, Tier 1 capital significantly more in response to higher requirements after the crisis than they did before the crisis. However, the effects of capital requirements on lending and risk-weighted asset growth both before and after the crisis are similar. Our results suggest that both before and after the crisis, a 1 percentage point increase in capital requirements lowered annual loan (risk-weighted asset) growth by 8 (12) basis points.

Effect of Bank Capital Requirements on Bank Risk-taking and Financial Stability

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

Do capital requirements affect cost efficiency? Evidence from China

This paper contributes to the debate on the effect of capital requirements on cost efficiency. We study the relation between capital ratio and cost efficiency for Chinese banks over the period 2004–2009, taking advantage of the profound regulatory changes in capital requirements that occurred during this period to measure the exogenous impact of an increase in the capital ratio on banks’ cost efficiency. We find that such an increase has a positive effect on cost efficiency, the size of which depends to an extent on the bank's ownership type. Our results therefore suggest that capital requirements can improve cost efficiency.

Do Capital Requirements Affect Bank Efficiency? Evidence from China

This paper contributes to the debate on the effect of capital requirements on bank efficiency. We study the relation between capital ratio and bank efficiency for Chinese banks over the period 2004−2009, taking advantage of the profound regulatory changes in capital requirements that occurred during this period to measure the exogenous impact of an increase in the capital ratio on banks’ cost efficiency. We find that such an increase has a positive effect on cost efficiency, the size of which depends to an extent on the bank’s ownership type. Our results therefore suggest that capital requirements can improve bank efficiency.

English

  This paper examines the effects of capital regulation on the optimal bank interest margin with two related bank objectives of option-based equity return maximization and equity risk minimization. We find that an increase in the capital-to-deposits ratio decreases the optimal interest margin under the equity return maximization, but increases the margin under the equity risk minimization. The proposed Basel system as such enables the bank to be more prone to loan risk when the objective is the equity return maximization, thereby adversely affecting the stability of the banking system, but to be less prone to loan when the objective is the equity risk minimization, thereby substantially contributing the stability. As a consequence, we argue that the effect of capital requirements on the safety of the banking system depends on the selection of the alternative objectives by banks, contributing to the literature's conflicting conclusions about capital regulation's effects on bank behavior.   Key words: Bank interest margin, capital regulation, equity return maximization, equity risk minimization.

Do banks respond to capital requirements? Evidence from Indonesia

Using dynamic panel data models, and addressing a common inappropriate use of simultaneous equation models in the literature, we examine the effect of capital requirements on banks’ behaviour in Indonesia. We find that banks tend to comply with capital requirements by increasing their capital ratios when the ratios are lower than, or falling towards, the 8% regulatory minimum. However, our results are mostly driven by large private-domestic banks and heavily undercapitalized banks that were closely monitored by the regulator in the aftermath of the 1998 crisis. Therefore, whether in normal circumstances banks in Indonesia comply with capital requirements remains questionable.

Reviewing Bank Regulatory Objectives Under Uncertail Information

A bank liquidation policy problem is analysed within a Merton framework where an appropriate notion of capital adequacy is introduced. The value of the deposit insurance liabilities and bank equity are derived. The effects of capital requirements on risk-shifting and bank reorganization are discussed, with a comparison of different regulatory regimes (in keeping with the Basel I and II Accords) and their impact on banks' behaviour.

Theories of bank behavior under capital regulation

This paper reviews academic studies of bank capital regulation in an effort to evaluate the intellectual foundation for the imposition of the Basel I and Basel II systems of risk-based capital requirements. The theoretical literature yields general agreement about the immediate effects of capital requirements on bank lending and loan rates and the longer-term impacts on bank ratios of equity to total or risk-adjusted assets. This literature produces highly mixed predictions, however, regarding the effects of capital regulation on asset risk and overall safety and soundness for the banking system as a whole. Thus, the intellectual foundation for the present capital-regulation regime is not particularly strong. The mixed conclusions in the academic literature on banking certainly do not provide unqualified support for moving to an even more stringent and costly system of capital requirements. These widely ambiguous results do suggest, however, that assessing the implications of capital regulation for balance-sheet risk and monitoring effort in diverse banking systems is an important agenda for future theoretical research in the banking area.

Bank Behavior under Capital Regulation: What Does the Academic Literature Tell Us?

This paper reviews academic studies of bank capital regulation in an effort to evaluate the intellectual foundation for the imposition of the Basel I and Basel II systems of risk-based capital requirements. The theoretical literature yields general agreement about the immediate effects of capital requirements on bank lending and loan rates and the longer-term impacts on bank ratios of equity to total or risk-adjusted assets. This literature produces highly mixed predictions, however, regarding the effects of capital regulation on bank asset risk and overall safety and soundness. Research also indicates that bank capital regulation can have procyclical macroeconomic effects and can impinge on the effectiveness of monetary policy. Although empirical research provides some support for the macroeconomic and monetary policy implications of risk-based capital requirements, conclusions about actual bank balance-sheet and risk adjustments to capital regulation are also mixed. Thus, the intellectual foundation for the present capital-regulation regime is not particularly strong. The mixed conclusions in the academic literature on banking certainly does not provide unqualified support for moving to an even more stringent and costly system of capital requirements.