Munich Personal RePEc Archive

The Effect of Capital Requirements on Banking Risk

Awdeh, Ali and EL-Moussawi, Chawki and Machrouh, Fouad (2011): The Effect of Capital Requirements on Banking Risk. Published in: International Research Journal of Finance and Economics No. 66 (2011): pp. 133-146.

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Using a two simultaneous equations model, we analysed the impact of capital requirements on bank risk-taking at Lebanese banks. Using a panel data set of 41 commercial banks between 1996 and 2008, we found that higher capital requirements are associated with increase in risk. We also found a positive correlation between bank profitability and increase in capital, which suggests that Lebanese banks rely on retained earnings to meet capital requirements. The competitive pressures seem to have no impact on bank capitalisation or bank risk-taking. Our findings showed that larger banks tend to hold lower capital and have better capability to control risk, mainly through diversification. Finally, we observed that funding decisions are correlated with risk-taking.

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