Impact Of Capital Regulation Research Articles

The Impact of Capital Regulations on Bank Margins of ASEAN Banking Sector

Basel Committee on banking supervision (BCBS) has issued Basel which requires the banks to comply with the minimum capital requirement after the crisis. Nevertheless, whether the requirement imposes impact the banking sector which comprises a dual banking system, in a positive manner is still questionable. Given the higher capital costs from the strict capital requirements, banks are being forced to raise bank margins. This study investigates the effect of capital regulations on conventional and Islamic banks’ margins covering the ASEAN banking system from 2009 to 2017. The empirical analysis uses dynamic panel data frameworks to reveal several factors affecting bank margins. Overall, the results suggest that the total regulatory capital ratio helps reduce the margins of conventional banks but does not influence the margins of Islamic banks. As for the Tier-1 capital ratio, the variable increases the Islamic bank margins but does not significantly affect conventional bank margins. Based on the analysis results, regulators of conventional banks need to impose capital requirements as suggested by Basel III to reduce bank margins. Meanwhile, as for Islamic banks, the bank margins can be reduced if regulators can introduce a separate set of requirements tailored explicitly for Islamic banks.

Impact of capital regulation on interest rate pass‐through in Sub‐Saharan Africa

AbstractUsing monthly data from 2005 to 2019, we employ a dynamic heterogeneous cross‐sectionally autoregressive distributed lag (CS‐ARDL) model to examine the impact of higher regulatory capital requirements on the interest rate pass‐through (IRPT) to bank lending and deposit rates in 22 Sub‐Saharan Africa (SSA) countries. Two key findings emerge from the investigation: (i) the average IRPT in SSA is incomplete in the long run, and (ii) stringent (higher) regulatory capital requirements reduce the pass‐through of monetary policy to commercial bank lending and deposit rates. The findings suggest that although higher regulatory capital requirements are an effective macro‐prudential tool for enhancing the stability of the banking sector, they could also have the unintended consequences of limiting economic expansion. This trade‐off calls for a careful analysis and balance in the implementation of monetary and bank regulatory policies in the region.

Impact of capital regulation on financial stability: a North-European study

Impact of capital regulation on financial stability: a North-European study

Impact of capital regulation on financial stability: a North-European study

Impact of capital regulation on financial stability: a North-European study

Croatian banks profitability under capital requirements pressure

Regulating bank behavior throughout capital requirements has been a focal point of prudential regulation since the late 1980s. However, their beneficial effect on the banking sector's safety and soundness was disputed ever since their initial implementation, mainly due to an assumption that they deteriorate bank profitability and increase the odds for the enlarged risk appetites of bank managers, especially in the highly competitive financial markets. On the other hand, bank profitability is driven by many factors other than compliance with capital regulation. Concerning that, a question about the capital requirements' impact on bank profitability was raised in this paper. The dynamic panel data analysis served to examine the consequences of bank capital regulation for the Croatian banking sector profitability, by taking into observation 24 commercial banks in the 2011-2016 timespan. The impact of capital regulation on the return on assets and net interest margin was positive, while for the return on equity a negative relationship was found. It was concluded that banks transfer regulatory costs on their clients, which was approximated with the net interest margin. In addition, results reveal that the overall bank profitability is achieved at the expense of bank shareholders. Thus, a more cost-efficient approach to managing a bank is suggested.

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 Leverage, Capital Requirements and the Implied Cost of (Equity) Capital

Do heightened capital requirements impose private costs on banks by adversely affecting their cost of capital? And if so, does the effect differ across different groups of banks? Using an international sample of listed banks over the period from 1990 to 2017, I find that equity investors adjust their expected return weakly in accordance with the Modigliani and Miller (1958) Theorem when banks decrease their leverage. The adjustment is stronger for smaller banks, banks that rely more on deposit financing and when debt is reduced rather than deposits, which never triggers a statistically significant adjustment. In any cases, the adjustment is not strong enough to keep banks' cost of capital constant which is estimated to increase by 10 to 40bps, representing a relative increase of 2.8% to 12.6%, when shifting equity from 8% to 16%. When using the 2011 EBA capital exercise as a quasi-natural experiment to identify the impact of capital regulation on bank's cost of capital, results indicate a strong reduction in required returns for the treated banks. However, the reduction is mainly caused by shifts in asset risk, highlighting the importance of differentiating between short-run and long-run effects.

Relationship among Capital Regulations, Risk and Efficiency: Comparison of Islamic with Conventional Banks in Pakistan

This paper examines and compares the relationships between capital regulations, risk and efficiency of Islamic banks with conventional banks in Pakistan from 2003 to 2015. By employing seemingly unrelated regression (SUR) this study finds that capital regulations have no significant effect on the risks taken by Pakistani Islamic banks. Capital regulations have increased the operational efficiency, while it has neither decreased nor increased the cost efficiency of the banks. The results of this study find no major difference in the capital regulations, risk and efficiency relationships between Islamic and conventional banks. The findings of this study also highlight the significant difference in the effect of capital regulations on the bank risks before and after the Global Financial Crisis of 2008, while there is no difference in the impact of capital regulations on bank efficiency before and after the 2008 crisis.

Interrelationship Among Basel Capital Regulation, Risk, and Efficiency in Pakistani Commercial Banks

This study examines the interrelationship among Basel capital regulations, risk, and efficiency of Pakistani commercial banks from 1997-2015. It uses the Generalized Method of Moments (GMM) technique from beginning of capital regulation in 1997 to 2015. We find that bank capital regulation reduces the bank risk. As far as the impact of capital regulation on bank efficiency is concerned, it reduces the bank efficiency. Our results also indicate that the effect of capital regulation on bank risk and cost efficiency is different for each of the Basel accords. Moreover, Basel II was more successful than Basel I in reducing the risk taken by banks, while its impact on the cost efficiency of banks was negligible.

The Impact of Capital Regulation on Bank Capital and Risk Decision. Evidence for European Global Systemically Important Banks

Large banks were largely blamed for the recent financial crisis, due to their roles in the propagation of the crisis. Partly due to the unprecedented amount of public funds disbursed to rescue the fail banks to avert the total breakdown of the global financial system and the resultant moral hazard of their bailout. Policymakers and regulators have significantly increased bank regulations after the crisis to rein-in some of the “excesses” of the banks that cause to the financial crisis. Particularly, Basel III capital regulation came into existence largely to strengthening the capital framework for banks and increases the loss absorbency for the so-called too big to fail banks. This study investigates the impact of capital regulation on the capital and risk portfolio behaviour of European large and complex banks during the period 2009–2014. By using a modified version of the structural equation model developed by Shrieves and Dahl (1992) to estimate the effect of capital regulation on banks’ capital and risk portfolios decisions. The findings of our model estimation indicate that regulation has a significant impact on changes in bank capital. We, however, do not find any significant evidence of the impact of regulation on bank risk portfolio decisions. Model estimation results also show that there is a significant negative relationship between changes in bank capital level and changes in risk portfolio level and vice versa.

Do Banking Regulations Affect Lending? The Case of the EU.

While many studies analysed the impact of capital regulations on lending, not much attention has been devoted to the role of other regulatory aspects in shaping credit expansion. The present study endeavours to fill this void by analysing the relation between a broad array of banking regulations and lending over two periods: 2005-2014 and the crisis period 2007-2010. The study covers 886 commercial banks from 27 EU countries. A further contribution of the study is an intertemporal approach to regulations. This method is applied to account for the fact that the substantial pre-crisis changes of the regulatory frameworks in the EU countries may have created an external shock to the banking system which affected lending. Also, the study endeavours to capture the effect of regulations on the quality of loans by analysing the dynamics of nonperforming loans (NPL). Finally, the paper aims at assessing the post crisis regulatory changes in the EU in terms of their potential effect on bank lending. The results indicate that several aspects of banking regulation impacted the level and quality of bank lending significantly, as well during the whole sample period, as during the crisis. The results have implications for the ongoing banking regulatory reform in the EU.

The role of capital regulation on bank performance

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.

The Impact of Bank Capital Regulation in Nigeria 'A Macro Econometric Simulations'

This paper provides new evidence on the effects of banking sector recapitalization in Nigeria. It set up a simple model of the banking firm, to investigating the impact of capital regulation on banks behavior as well as having possible effects on the economy. Time series data covering the year 1970-2004 were fitted to the regression model using both Ordinary Least Square (OLS) and Vector Error Correction (VEC) method of estimations. The results of the two methods were not significantly different. The simulations based on Vector Autoregressive (VAR) method indicate the importance of growth of economic activities (growth of GDP) as a major determinant of change in deposits and change in loans. The view that banks choose to shrink their balance sheet activities during the capital shocks is consistent with the findings.

Capital and Risk Adjustments Under Risk-Based Capital Regulations and Diversification Loss

In the last two decades, regulators have focused on the enforcement of minimum capital requirements on banks. Excessive risk-taking might otherwise have been encouraged by the principle of limited liability and by the availability of deposit insurance. Strengthened capital regulation has resulted in improved capital ratios for banks, and a more stable financial system. However, the changes to the regulatory system have been criticised on the grounds that an increased regulatory capital standards may encourage an increase in leverage and portfolio risk. Both the theoretical literature and the empirical literature on the impact of capital regulation have produced heterogeneous results concerning the capital and risk adjustment behaviour of banks. This study uses a cross-sectional time-series data set on commercial banks that is longer and more recent than in most other studies. We estimate the effect of changes in portfolio risk on the capital adjustment and of risk-based capital regulation on portfolio risk adjustment, using a simultaneous equations model. We find support for the capital buffer theory, which suggests that banks increase their capital holdings in response to an increase in portfolio risk, in order to avoid regulatory penalties. We also find evidence that banks increase their loan portfolio concentration in order to increase their regulatory capital ratios, suggesting that improvements in capital ratios are achieved at a cost in terms of the degree of diversification of the banks' loans portfolios.

An examination of voluntary versus involuntary security issuances by commercial banks: The impact of capital regulations on common stock returns

This paper examines differences in stock price reactions following voluntary capital injections by commercial banks and involuntary capital injections required to meet regulatory capital requirements. Empirical tests document that stock price declines associated with voluntary common stock issues are significantly greater than those associated with involuntary common stock injections, consistent with Ross (1977). Empirical test also confirm that for both voluntary and involuntary stock issuances, the abnormal stock price reaction is negatively related to the relative size of the offering and positively related to managerial ownership prior to the security issue, although these relationships are stronger for voluntary issues.