TITLE:
The Effects of Capital on Bank Risk-Taking: New Evidence for the European Banking System
AUTHORS:
Josanco Floreani, Giulio Velliscig, Piserà Stefano, Maurizio Polato
KEYWORDS:
Bank Capital, Leverage, Loan Coverage, Bank Regulation, Bank Risk, Bank Size
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.3,
June
30,
2023
ABSTRACT: After the eruption of the global financial crisis, the banking sector has
gone through profound regulatory reforms aimed at strengthening the stability
of the entire financial system. Based on a sample of 62 listed banks in the
European Economic Area Region, during the period 2005q1-2018q4, this paper
investigates the impact of capital policies on bank risk-taking. Results show how the Tier 1 capital ratio and the Tier 1
leverage ratio represent a crucial factor in explaining bank risk,
especially for small banks and during financial turmoil periods. Additionally, we find that the introduction of mandatory disclosure of the Tier 1 leverage ratio and the Tier 1 capital ratio reduced
the bank risk-taking of higher leveraged and capitalized banks. Our findings
have significant implications for both the banking industry and policymakers
alike.