Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk

Posted: 1 Nov 2009 Last revised: 22 Mar 2014

See all articles by Boubacar Camara

Boubacar Camara

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR)

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE)

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: January 1, 2013

Abstract

We investigate the impact of changes in capital of European banks on their risk-taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks’ risk changes. We find that, for highly capitalized, adequately capitalized and strongly undercapitalized banks, an increase in equity or in subordinated debt positively affects risk. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital or subordinated debt. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.

Keywords: Bank risk, Bank capital, Capital regulation, European banks

JEL Classification: G21, G28

Suggested Citation

Camara, Boubacar and Lepetit, Laetitia and Tarazi, Amine, Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk (January 1, 2013). Applied Economics, vol. 45 (34), 4831-4856, 2013, Available at SSRN: https://ssrn.com/abstract=1496818 or http://dx.doi.org/10.2139/ssrn.1496818

Boubacar Camara

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR) ( email )

Paris
France

Laetitia Lepetit (Contact Author)

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Felix Eboue
BP 3127
Limoges Cedex 1, 87031
France
+33555149213 (Phone)

HOME PAGE: http://www.unilim.fr/lape/

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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