Bank regulations, bank competition and bank risk-taking: Evidence from Japan

We study the relaxation of the capital requirements regulation in Japan around the global financial crisis of 2007–08, which represents a change in bank regulation, to test whether an effect of bank competition on risk-taking is moderated by a change in bank regulation. Although this particular change in bank regulation in Japan was primarily meant to help stabilize the banking system, we show that there is evidence for some spillover effects on bank risk-taking. We find that bank competition is positively associated with ex ante bank risk-taking, roughly measured as loan growth and the interest rate margin. We show that the relaxation of the capital adequacy requirement affects the influence of bank competition on bank risk-taking. With domestically active banks getting more preferential treatments from the regulatory change, the relaxation of the regulation appears to have the differential effects on bank risk-taking across the domestically active banks and the internationally active banks in Japan.