The effect of stricter capital regulation on banks’ risk-taking: Theory and evidence

Frederik Lundtofte; Caren Yinxia Nielsen

doi:10.1111/eufm.12205

The effect of stricter capital regulation on banks’ risk-taking: Theory and evidence

Frederik Lundtofte, Caren Yinxia Nielsen

Research output: Contribution to journal › Journal article › Research › peer-review

10 Citations (Scopus)

Abstract

A simple portfolio choice model shows that, when a bank's capital is constrained by regulation, regulatory cost (risk weightings) alters the risk and value calculations for the bank's assets. In particular, we find that banks may respond to stricter regulation by increasing the share of high-risk assets. Our empirical results show that US banks responded to the implementation of the stricter Basel II regulations by increasing the share of high-risk assets in the risky part of their portfolios.

Original language	English
Journal	European Financial Management
Volume	25
Issue number	5
Pages (from-to)	1229-1248
Number of pages	20
ISSN	1354-7798
DOIs	https://doi.org/10.1111/eufm.12205
Publication status	Published - 1 Nov 2019
Externally published	Yes

Keywords

Asset risk
Banks
credit risk
portfolio choice
risk-based capital regulation G11

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10.1111/eufm.12205

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The effect of stricter capital regulation on banks’ risk-taking: Theory and evidence

Abstract

Keywords

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