The Relationship between Risk and Capital in Commercial Banks
Journal of Banking & Finance, Volume 16, Issue 2, April 1992, Pages 439–457
Posted: 27 Aug 2014 Last revised: 5 Sep 2014
Date Written: April 1992
This study investigates the relationship between changes in risk and capital in a large sample of banks. A positive association between changes in risk and capital is found. The fact that this finding holds in banks with capital ratios in excess of regulatory minimum levels supports the conclusion that, for most banks, bank owners' and/or managers' private incentives work to limit total risk exposure. Results for banks which were undercapitalized by regulatory standards indicate that regulation was at least partially effective during the period covered. Overall, the findings support a conclusion that changes in bank capital over the period studied have been ‘risk-based’.
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