Capital Regulation and Credit Risk Taking: Empirical Evidence from Banks in Emerging Market Economies

Abstract

The primary purpose of this article is to investigate the relationship between bank capital and credit risk taking in emerging market economies. We also investigate the influence of several regulatory, institutional and legal features on the relationship between risk and capital. We apply a simultaneous equations framework following Shrieves and Dahl (1992) and Jacques and Nigro (1997). Our results corroborate the existing findings for US and other industrial economies, putting forward the impact of capital regulation on banks' behavior. We also show empirical evidence on the role of the regulatory, institutional and legal environment in driving bank capitalization and credit risk taking behavior in emerging market economies.

Keywords: Bank capital and risk taking, bank regulation, emerging market economies, regulatory, institutional and legal environment

JEL Classification: C31, F39, G21, G28