**5. Global evidences**

Reviews of theoretical models that explain the effect of capital requirements on bank risk behaviors show that the prediction of these models highly depends on model assumptions. This makes the results vary when certain assumptions are relaxed. Thus, a substantial effort has relied on empirical evidences to investigate the effect of the risk-based capital regulation on bank risk-taking. Most researches are carried out in the USA and the European countries, which are members of the Basel Committee. The results, however, differ across countries and time period (see **Table 2**).


**71**

*Bank Risk Management: A Regulatory Perspective DOI: http://dx.doi.org/10.5772/intechopen.79822*

> Cannata and Quagliariello [49]

Teply and Matejasák [44]

Camara et al. [50]

Nachane and Saibal [52]

Zhang et al. [32]

Parinduri and Riyanto [53]

Lee and Hsieh [54]

Bouheni and Rachdi [56]

Pereira and Saito [57]

Godlewski [58]

Hussain and Hassan [59]

**Authors Risk proxy Capital** 

+ Risk-weighted asset ratio + Bad debt ratio

Risk-weighted asset ratio

+ Risk-weighted asset ratio + Nonperforming loan ratio + Default risk + Z-score

Saadaoui [51] Nonperforming

Bouri [55] + Risk-weighted

Saadaoui [51] Nonperforming

loan ratio

Risk-weighted asset ratio

loan ratio

Risk-weighted asset ratio

Risk-weighted asset ratio

Risk-weighted asset ratio

+ Variance of ROE + Loan loss reserve ratio

asset ratio + Loan loss provision ratio

Risk-weighted asset ratio

Risk-weighted asset ratio

Nonperforming loan ratio

**regulation proxy**

Dummy approach

Gap and Probabilistic approach

Dummy approach

Gap approach

Gap approach

Gap approach

Dummy and Probabilistic approach

Capital regulatory index

Gap approach

Probabilistic approach

Dummy approach

Dummy and gap approach

Gap approach

Gap approach **Effect of capital regulation on risk**

+ Positive effect for risk-weighted asset

ratio + No effect for default risk

No effect

banks

banks

No effect

No effect

No effect

ratio

No effect

Negative effect

+ No effect for dummy approach and for wellcapitalized banks under gap approach + Negative effect for undercapitalized banks under gap approach

Positive effect

Negative effect

Negative effect

+ Positive effect for variance of ROE + Negative effect for loan loss reserve

+ Positive for riskweighted asset ratio + No effect for loan loss provision ratio

+ Positive effect for highly capitalized and undercapitalized

+ Negative effect for adequately and strongly undercapitalized

**period**

2003

2005

1992– 2006

1995– 2005

1998

2006

2005

1994– 2008

2005

2013

2009

1996– 2001

1995– 2005

1994– 2002

India 1997–

China 2004–

Indonesia 2000–

Tunisia 1992–

Tunisia 2000–

Brazil 2001–

Emerging markets

Emerging markets

Developing countries

**Country Time** 

Italy 1994–

EU 15 2000–

17 EU countries

G-10 Countries

42 Asian countries


#### *Bank Risk Management: A Regulatory Perspective DOI: http://dx.doi.org/10.5772/intechopen.79822*

*Perspectives on Risk, Assessment and Management Paradigms*

larger with the increase in asset risk.

**5. Global evidences**

**Country Time** 

The USA 1990–

The USA 1990–

The USA 2000–

The USA 2003–

Switzerland 1989–

Germany 1994–

The USA, Canada, France, Italy, the UK, Japan **period**

1991

1997

2005

2006

1995

2002

1988– 1995

Incorporating the difference in manager's incentives with those of the shareholders and deposit insurers in a model with four distinct characteristics on the risk-return asset profiles, Jeitschko and Jeung [41] show that under capital regulation, the bank risk varies with the relative forces of these agents. If the shareholder's objective dominates, the bank risk might decrease with higher capital requirement. In contrast, a manager-driven bank is inclined to undertake more risk under

tightened capital requirements because in such case, the manager's private benefit is

Reviews of theoretical models that explain the effect of capital requirements on bank risk behaviors show that the prediction of these models highly depends on model assumptions. This makes the results vary when certain assumptions are relaxed. Thus, a substantial effort has relied on empirical evidences to investigate the effect of the risk-based capital regulation on bank risk-taking. Most researches are carried out in the USA and the European countries, which are members of the Basel Committee. The

**Authors Risk proxy Capital** 

Risk-weighted asset ratio

Risk-weighted asset ratio

Risk-weighted asset ratio

Risk-weighted asset ratio

asset ratio

asset ratio

Risk-weighted asset ratio

Rime [46] Risk-weighted

Van Roy [48] Risk-weighted

**regulation proxy**

Gap approach

Dummy approach

Gap and Probabilistic approach

Dummy and gap approach

Dummy and probabilistic approach

Probabilistic and rollingwindow approach

Probabilistic approach

**Effect of capital regulation on risk**

+ No effect for undercapitalized

+ Negative effect for well-capitalized

+ Positive and no effect before 1993 + Negative effect during 1993–1996

+ Negative effect for undercapitalized

+ No effect for wellcapitalized banks

Positive effect

+ Negative effect for banks with low capital buffer + Positive effect for banks with high capital buffer

No effect

No effect

banks

banks

banks

results, however, differ across countries and time period (see **Table 2**).

Jacques and Nigro [42]

Aggarwal and Jacques [43]

Teply and Matejasák [44]

Abreu and Gulamhussen [45]

Heid et al. [47]

**70**


*Notes: + Gap approach measures capital regulation as the distance of bank capital ratio from certain threshold, usually the minimum capital requirement.*

*+ Dummy approach assigns value 1 for banks whose capital ratios are less than certain threshold and 0 otherwise.*

*+ Probabilistic approach assigns value 1 for banks which are probably to be under regulatory pressure and 0 otherwise.*

#### **Table 2.**

*Global evidences about the effect of capital regulation on bank risk.*
