The Effect of Stricter Capital Regulation on Banks' Risk‐Taking: Theory and Evidence

Frederik Lundtofte, Caren Yinxia Nielsen

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Abstrakt

A simple portfolio choice model shows that, when a bank's capital is constrained by regulation, regulatory cost (risk weightings) alters the risk and value calculations for the bank's assets. In particular, we find that banks may respond to stricter regulation by increasing the share of high‐risk assets. Our empirical results show that U.S. banks responded to the implementation of the stricter Basel II regulations by increasing the share of high‐risk assets in the risky part of their portfolios.
OriginalsprogEngelsk
TidsskriftEuropean Financial Management
Vol/bind25
Udgave nummer5
Sider (fra-til)1229-1248
Antal sider20
ISSN1354-7798
DOI
StatusUdgivet - nov. 2019

Bibliografisk note

Published online: 11. November 2018

Emneord

  • Banks
  • Asset risk
  • Credit risk
  • Portfolio choice
  • Risk-based capital regulation

Citationsformater