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The Effect of Capital Requirements on Banking Risk

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  • Awdeh, Ali
  • EL-Moussawi, Chawki
  • Machrouh, Fouad

Abstract

Using a two simultaneous equations model, we analysed the impact of capital requirements on bank risk-taking at Lebanese banks. Using a panel data set of 41 commercial banks between 1996 and 2008, we found that higher capital requirements are associated with increase in risk. We also found a positive correlation between bank profitability and increase in capital, which suggests that Lebanese banks rely on retained earnings to meet capital requirements. The competitive pressures seem to have no impact on bank capitalisation or bank risk-taking. Our findings showed that larger banks tend to hold lower capital and have better capability to control risk, mainly through diversification. Finally, we observed that funding decisions are correlated with risk-taking.

Suggested Citation

  • Awdeh, Ali & EL-Moussawi, Chawki & Machrouh, Fouad, 2011. "The Effect of Capital Requirements on Banking Risk," MPRA Paper 119114, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119114
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank capital; Capital regulation; Banking risks.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K2 - Law and Economics - - Regulation and Business Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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