Quadratic effect of bank size on capital regulation and risk-taking behavior: Evidence from the Central Europe

Syed Moudud-Ul-Huq and Musfikur Rahman ()
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Syed Moudud-Ul-Huq: Department of Finance, Performance & Marketing, Teesside University International Business School (TUIBS), Teesside University, United Kingdom2Department of Accounting, Mawlana Bhashani Science and Technology University, Tangail, Bangladesh
Musfikur Rahman: Department of Accounting, Mawlana Bhashani Science and Technology University, Tangail, Bangladesh

International Journal of Financial Engineering (IJFE), 2023, vol. 10, issue 03, 1-22

Abstract: This paper primarily examines the quadratic effect of banks’ size on capital regulation and risk-taking behavior by using simultaneous equation approach. This paper primarily examines the quadratic effect of banks’ size on capital regulation and risk-taking behavior by using simultaneous equation approach. To carry out the objective, this study has been built on the two-stage least squares (2SLS) method for a dynamic unstructured panel data of 85 banks from the Central European banks for the period 2012–2017. There is a positive and significant relation between regulatory capital and risk. Also, higher risk-taking behavior causes banks to sacrifice their stability. This study also finds that there is a negative correlation between bank size and capital, indicating that larger the bank size lower tendency to keep capital more. In similar way, there is also a negative association between bank size and risk taking, indicating that lower tendency of taking risk by large banks and vice-versa. Finally, this paper can be used as a medium of information for the stakeholders of banks and others financial institutions of the country. There is a dearth of literature which was built on the quadratic effect of bank size regarding recent financial regulation and risk.

Keywords: Capital regulation; risk-taking; unbalanced panel data; bank size; two-stage least squares (2SLS) (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2424786323500196

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