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The Risk-sensitivity of Bank Capital Requirements: The Moderating Effects of Capital Regulation and Supervisory Power

Mohamed Albaity and Mohammadmahdi Toobaee
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Mohamed Albaity: Department of Finance and Economics, College of Business Administration, University of Sharjah, Sharjah, 27272, UAE,
Mohammadmahdi Toobaee: Department of Banking and Finance, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, 50603, Malaysia

International Journal of Economics and Financial Issues, 2017, vol. 7, issue 2, 94-102

Abstract: This study examines the moderating effects of capital regulation and supervisory power on the risk-sensitivity of bank capital requirements. Using two-step system generalized method of moments (GMM) estimator, we work on the international sample of 222 banks charted in 30 countries. The finding suggests that asset volatility is a critical variable in explaining the risk-sensitivity of banks. The results indicate that stricter capital regulatory regimes and higher supervisory power enhance the risk sensitivity of capital requirements. Moreover, the capital regulation was found to moderate the relationship between asset volatility and risk-sensitivity while supervisory power was found not to exert any impact on the level of risk of the banks. Another interesting result is that governments with a higher debt to gross domestic product ratio tend to overregulate the other banks’ investments compared to government bonds. This is the first study that investigates the moderating effects of capital regulation and power of supervision on the risk sensitivity of capital requirements. The results of this study show that the efficiency of risk-based capital requirements depends on the stringency of capital regulation in different countries.

Keywords: Bank Capital Requirements; Risk-weighted Assets; Capital Regulation; Supervisory Power; System Generalized Method of Moments; Government Debt to Gross Domestic Product (search for similar items in EconPapers)
JEL-codes: G21 G34 G33 G28 (search for similar items in EconPapers)
Date: 2017
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