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Basel Capital Requirements and Bank Credit Risk Taking In Developing Countries

Mohammed Hussain and M. Kabir Hassan

No 2005-01, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: Existing literature has focused attention on the impact of Basle I and similar capital requirement regulations on developed countries where such regulations were found to be effective in increasing capital ratios and reducing portfolio credit risk of commercial banks. In the present study, we study the impact of such capital requirement regulations on commercial banks in 11 developing countries around the world within a cross-section framework with the widely popular simultaneous equations model of Shrieves and Dahl (1992). Surprisingly, we find that such regulations did not increase the capital ratios of banks in the developing countries. This implies that particular attention should be given to the business, environmental, legal, cultural realities of such countries while designing and implementing such policies for developing countries. However, we find evidence that such regulations did reduce portfolio risk of banks. We also find that capital ratios and portfolio risk are inversel.

Keywords: Capital requirement; Commercial banks; Credit risk (search for similar items in EconPapers)
JEL-codes: G21 G28 C12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-reg and nep-rmg
Date: 2005
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