Do Capital Buffers Add to Bank Risk-Taking in South-Eastern Europe? A Look at the Pre-Basel III Period

Ana Kundid Novokmet ()
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Ana Kundid Novokmet: University of Split

A chapter in The Changing Financial Landscape, 2021, pp 141-169 from Springer

Abstract: Abstract Based on a dynamic panel data analysis of South-Eastern European (SEE) banks over 10-year period, this paper explores risk-taking implications of changes in capital buffers. Its findings support the capital buffer theory. Firstly, banks increase their asset riskiness within the capital buffers increase and vice versa. Asset riskiness is measured with the risk-weighted assets over total assets and average credit price. However, capital buffers positively impact the risk index (z-score), i.e., reduce banks’ overall riskiness. Empirical results confirm appropriateness of restrictive capital regulation as well as recent capital buffers regulation as they add to an overall bank stability and push lower capitalized banks to decrease their risks. In addition, banks’ riskiness is also driven with bank size, liquidity, growth, and profitability. Thus, results justify a need for more discretionary approach in prescribing the capital requirements in order to target capital building to those banks which transfer regulatory capital costs to their clients throughout credit availability and affordability. A closer prudential attention should be paid to larger banks due to their increased risk-taking behavior as well as to banks which continuously maintain their capital buffers on minimum. Altogether, a conclusion can be made that commercial banks in the South-Eastern Europe in the post-transitional era do not suffer from a collective moral hazard behavior induced by the restrictive capital regulation, nor their increased risk-taking is without discretionary capital build-up.

Keywords: Capital requirements; Banking regulation; Risk-taking; Panel data analysis; South-Eastern Europe; G21; G28; P34 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:conchp:978-3-030-82778-6_9

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DOI: 10.1007/978-3-030-82778-6_9

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