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Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk

Boubacar Camara, Laetitia Lepetit and Amine Tarazi

Débats économiques et financiers from Banque de France

Abstract: We investigate the impact of changes in capital of European banks on their risk-taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks? risk changes. We find that, for highly capitalized, adequately capitalized and strongly undercapitalized banks, an increase in equity or in subordinated debt positively affects risk. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital or subordinated debt. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.

Keywords: Bank Risk; Bank Capital; Capital regulation; European banks. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-rmg
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Journal Article: Ex ante capital position, changes in the different components of regulatory capital and bank risk (2013) Downloads
Working Paper: Ex ante capital position, changes in the different components of regulatory capital and bank risk (2013)
Working Paper: Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:decfin:7

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