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The effect of stricter capital regulation on banks’ risk-taking : Theory and evidence

Lundtofte, Frederik LU and Nielsen, Caren Yinxia LU (2019) In European Financial Management 25(5). p.1229-1248
Abstract

A simple portfolio choice model shows that, when a bank's capital is constrained by regulation, regulatory cost (risk weightings) alters the risk and value calculations for the bank's assets. In particular, we find that banks may respond to stricter regulation by increasing the share of high-risk assets. Our empirical results show that US banks responded to the implementation of the stricter Basel II regulations by increasing the share of high-risk assets in the risky part of their portfolios.

Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Asset risk, Banks, credit risk, portfolio choice, risk-based capital regulation G11
in
European Financial Management
volume
25
issue
5
pages
20 pages
publisher
Wiley-Blackwell
external identifiers
  • scopus:85061050025
ISSN
1354-7798
DOI
10.1111/eufm.12205
language
English
LU publication?
yes
id
fb1926c3-f890-468e-b1b0-b826002230e8
date added to LUP
2019-02-12 13:23:18
date last changed
2022-04-25 21:10:37
@article{fb1926c3-f890-468e-b1b0-b826002230e8,
  abstract     = {{<p>A simple portfolio choice model shows that, when a bank's capital is constrained by regulation, regulatory cost (risk weightings) alters the risk and value calculations for the bank's assets. In particular, we find that banks may respond to stricter regulation by increasing the share of high-risk assets. Our empirical results show that US banks responded to the implementation of the stricter Basel II regulations by increasing the share of high-risk assets in the risky part of their portfolios.</p>}},
  author       = {{Lundtofte, Frederik and Nielsen, Caren Yinxia}},
  issn         = {{1354-7798}},
  keywords     = {{Asset risk; Banks; credit risk; portfolio choice; risk-based capital regulation G11}},
  language     = {{eng}},
  number       = {{5}},
  pages        = {{1229--1248}},
  publisher    = {{Wiley-Blackwell}},
  series       = {{European Financial Management}},
  title        = {{The effect of stricter capital regulation on banks’ risk-taking : Theory and evidence}},
  url          = {{http://dx.doi.org/10.1111/eufm.12205}},
  doi          = {{10.1111/eufm.12205}},
  volume       = {{25}},
  year         = {{2019}},
}