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Dynamics of bank capital ratios and risk-taking: Evidence from US commercial banks

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  • Faisal Abbas
  • Shoaib Ali
  • David McMillan

Abstract

This study aims to explore how different capital ratios influence the risk-taking of large commercial banks of the USA. The study collects the data from FDIC for commercial banks from 2003 to 2019. We use a two-step GMM method to manage the endogeneity, simultaneity, heteroscedasticity, and auto-correlations issue. The findings conclude that an increase in the risk-based capital ratios decreases the banks’ risks. Empirical findings demonstrated a significant and positive association between non-risk-based capital ratios and bank risk-taking. The findings also demonstrate that an increase in capital buffer ratios decreases the banks’ risks. The impact of capital ratios on risk-taking is heterogeneous for well and under-capitalized banks. The findings suggest that State-chartered member and non-member banks are inclined to take a higher risk than nationally chartered banks. The findings have implications for regulators to consider the State-chartered member, non-member, and nationally chartered banks while formulating the new guidelines for required capital ratios.

Suggested Citation

  • Faisal Abbas & Shoaib Ali & David McMillan, 2020. "Dynamics of bank capital ratios and risk-taking: Evidence from US commercial banks," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1838693-183, January.
    • Handle: RePEc:taf:oaefxx:v:8:y:2020:i:1:p:1838693
    DOI: 10.1080/23322039.2020.1838693
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    Cited by:

    1. Faisal Abbas & Shoaib Ali & Imran Yousaf & Wing-Keung Wong, 2021. "Dynamics of Funding Liquidity and Risk-Taking: Evidence from Commercial Banks," JRFM, MDPI, vol. 14(6), pages 1-16, June.
    2. Faisal Abbas & Imran Yousaf & Shoaib Ali & Wing-Keung Wong, 2021. "Bank Capital Buffer and Economic Growth: New Insights from the US Banking Sector," JRFM, MDPI, vol. 14(4), pages 1-13, March.
    3. Faisal Abbas & Shoaib Ali, 2022. "Is Economic Freedom a Moderator of the Relationship Between Bank Capital and Profitability?," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 69(2), pages 273-292, June.

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