Capital Adequacy and Systemic Risk of Banks in India

20 Pages Posted: 27 Apr 2020

See all articles by Mihir Dash

Mihir Dash

Alliance University - School of Business

Date Written: April 1, 2017

Abstract

This study examines the role of capital adequacy in systemic risk for banks in India. The moderator variables considered for the study include bank size, non-performing assets, leverage, deposits, loans & advances, and investments. A fixed-effects panel regression model was applied, with bank fixed effects and year fixed effects.

The study contributes to the literature by proposing the concept of minimum level of capital adequacy for neutral systemic risk, which is the level of capital adequacy for which the systemic risk is non-positive. The results of the study indicate that bank size, non-performing assets, leverage, and loans & advances have a significant impact on the minimum capital adequacy for neutral systemic risk. Further, the results of the study suggest that the role of capital adequacy in systemic impact was different for public sector and private sector banks.

The study suggests that, instead of setting a fixed capital adequacy level for all banks, the model can be used to set capital adequacy targets for individual banks with estimates or projections of the bank’s characteristics. This can be used in conjunction with the Basel III framework in order to rationalise capital adequacy targets.

Keywords: systemic risk, capital adequacy, neutral systemic risk, public sector banks, private sector banks

JEL Classification: G28

Suggested Citation

Dash, Mihir, Capital Adequacy and Systemic Risk of Banks in India (April 1, 2017). Available at SSRN: https://ssrn.com/abstract=3567375 or http://dx.doi.org/10.2139/ssrn.3567375

Mihir Dash (Contact Author)

Alliance University - School of Business ( email )

Chikkahagade Cross,
Chandapura-Anekal Road, Anekal
Bangalore, Karnataka 562106
India
9945182465 (Phone)

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