The effect of stricter capital regulation on banks’ risk-taking : Theory and evidence
(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:
https://lup.lub.lu.se/record/fb1926c3-f890-468e-b1b0-b826002230e8
- author
- Lundtofte, Frederik LU and Nielsen, Caren Yinxia LU
- organization
- publishing date
- 2019-11
- 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}}, }