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Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period

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Abstract

In recent years, regulators have increased their focus on the capital adequacy of banking institutions to enhance their stability, hence the stability of the whole financial system. The purpose of this paper is to assess and compare how American and European banks adjust their level of capital and portfolio risk under capital regulation, whether and how they react to constraints placed by the regulators. In order to do this, we estimate a modified version of the simultaneous equations model developed by Shrieves and Dahl. This model analyzes adjustments in capital and risk at banks when they approach the minimum regulatory capital level. The results indicate that regulatory requirements have the desired effect on bank behavior. Both American and European banks that are close to minimum requirements simultaneously increase their capital. In addition, the US banks decrease their portfolio risk taking.

Suggested Citation

  • Petr Teply & Milan Matejašák, 2007. "Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period," Working Papers IES 2007/23, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007.
    • Handle: RePEc:fau:wpaper:wp2007_23
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    Cited by:

    1. Faisal Abbas & Zahid Irshad Younas, 2021. "How Do Bank Capital and Capital Buffer Affect Risk: Empirical Evidence from Large US Commercial Banks," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(2), pages 109-131.
    2. Karel Janda, 2011. "Credit Rationing and Public Support of Commercial Credit," CERGE-EI Working Papers wp436, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Karel Janda, 2008. "Which Government Interventions Are Good in Alleviating Credit Market Failures?," Working Papers IES 2008/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2008.
    4. Karel Janda, 2011. "Credit Guarantees and Subsidies when Lender has a Market Power," Working Papers IES 2011/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
    5. Nguyen, Quang Thi Thieu & Gan, Christopher & Li, Zhaohua, 2019. "Bank capital regulation: How do Asian banks respond?," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    banking regulation; Basel Capital Accord; capital adequacy; banks; simultaneous equations model;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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