How Do Capital Ratios Affect Bank Risk-Taking

New Evidence From the United States

Bibliographic Data

ID3333477
AuthorsFaisal Abbas (0000-0002-6109-6777, University of Lahore, corresponding author), Omar Masood (0000-0001-5481-4032, University of Lahore), Shoaib Ali (0000-0001-5954-9987, Air University), Sohail Rizwan (0000-0002-9712-8494, University of Malaya)
Year2021
Volume11
Issue1
Publication date2021-01-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueSAGE Open (JOURNAL)
Journal identifiersISSN: 2158-2440 • E-ISSN: 2158-2440
PublisherSAGE Publications Inc (PUBLISHER)
DOI10.1177/2158244020979678
OpenAlexW3119212905
LanguageEN
Citations received2
References cited47

This study aims to examine the impact of different capital ratios on Non-Performing loans, Loan Loss Reserves, and Risk-Weighted Assets by studying large commercial banks of the United States. The study employed a two-step system generalized method of movement (GMM) approach by collecting the data over the period ranging from 2002 to 2018. The study finds that using Non-Performing loans and Loan Loss Reserves as a proxy for risk, results support moral hazard hypothesis theory, whereas the results support regulatory hypothesis theory when Risk-Weighted Assets is used as a proxy for risk. The results confirm that the influence of high-quality capital on Non-Performing loans, Loan Loss Reserves, and Risk-Weighted Assets is substantial. The distinctive signs of Non-Performing loans, Loan Loss Reserves, and Risk-Weighted Assets have indications for policymakers. The results are intimate for formulating new guidelines regarding risk mitigation to recognize Non-Performing loans and Loan Loss Reserves and the Risk-Weighted Assets for better results. JEL Classification: G21, G28, G29

Actuarial science · Business · Economics · Incentive · Loan · Moral hazard · Non-performing loan · Statistics · Banking stability, regulation, efficiency · Housing Market and Economics · Islamic Finance and Banking Studies · Finance

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