Bank Capital and Incentives for Risk-Taking

2002 ◽  
Author(s):  
Alistair Milne ◽  
A. Elizabeth Whalley
Keyword(s):  
Risk Taking ◽  
Bank Capital

scholarly journals Market structure, institutional quality and bank capital ratios: evidence from developing countries

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Oyebola Fatima Etudaiye-Muhtar ◽  
Zayyad Abdul-Baki
Keyword(s):  
Market Structure ◽  
Risk Taking ◽  
Commercial Banks ◽  
Institutional Quality ◽  
Bank Capital ◽  
Content Type ◽  
Regulatory Quality ◽  
Capital Ratios ◽  
Excessive Risk Taking ◽  
Excessive Risk

PurposeThis paper investigates the role of market structure and institutional quality in determining bank capital ratios in developing economies.Design/methodology/approachThe generalised methods of moment technique is used to control for auto-correlation and endogeneity in a sample of 79 publicly listed commercial banks. The study period is between 2000 and 2016.FindingsResults show that market structure (proxied with bank competition) as well as institutional quality (regulatory quality) lowers bank capital in the sampled banks. This suggests that banks operating in less competitive markets with good regulatory quality do not need to engage in excessive risk-taking activities that would necessitate holding increased level of capital. Furthermore, the interaction of competition and regulatory quality reinforces the main findings, suggesting the importance of the two variables in determining bank capital ratio.Research limitations/implicationsResearch has limitation in that the study investigated publicly listed commercial banks, the findings may not be applicable to non-listed banks.Practical implicationsTaking into cognisance the developing nature of the banking system in Africa, the findings from this study imply that the maintenance of an improved regulatory quality in an environment where healthy competition exists would encourage banks to hold capital ratios appropriate for their level of banking activities, that is, the banks would not engage in excessive risk-taking activities.Originality/valueThis is one of the first papers that examine the effect of market structure and institutional quality on bank capital ratios in developing countries that have bank-based financial systems.

scholarly journals Developing “best practices” for bankers’ pay in line with Basel III.

2011 ◽  
Vol 1 (3) ◽  
pp. 7-16 ◽  
Author(s):  
Peiyi Yu ◽  
Jessica Hong Yang ◽  
Nada Kakabadse
Keyword(s):  
Financial Crisis ◽  
Risk Taking ◽  
Global Financial Crisis ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Incentive Compensation ◽  
Basel Iii ◽  
Bank Capital ◽  
Bank Executives ◽  
The Global Financial Crisis

This paper proposes hybrid capital securities as a significant part of senior bank executive incentive compensation in light of Basel III, a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The committee developed Basel III in a response to the deficiencies in financial regulation brought about by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The hybrid bank capital securities we propose for bank executives’ compensation are preferred shares and subordinated debt that the June 2004 Basel II regulatory framework recognised as other admissible forms of capital. The past two decades have witnessed dramatic increase in performance-related pay in the banking industry. Stakeholders such as shareholders, debtholders and regulators criticise traditional cash and equity-based compensation for encouraging bank executives’ excessive risk taking and short-termism, which has resulted in the failure of risk management in high profile banks during the global financial crisis. Paying compensation in the form of hybrid bank capital securities may align the interests of executives with those of stakeholders and help banks regain their reputation for prudence after years of aggressive risk-taking. Additionally, banks are desperately seeking to raise capital in order to bolster balance sheets damaged by the ongoing credit crisis. Tapping their own senior employees with large incentive compensation packages may be a viable additional source of capital that is politically acceptable in times of large-scale bailouts of the financial sector and economically wise as it aligns the interests of the executives with the need for a stable financial system.

scholarly journals Optimal Monetary and Prudential Policies

2017 ◽  
Vol 9 (1) ◽  
pp. 40-87 ◽  
Author(s):  
Fabrice Collard ◽  
Harris Dellas ◽  
Behzad Diba ◽  
Olivier Loisel
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Deposit Insurance ◽  
Limited Liability ◽  
Capital Requirements ◽  
Bank Capital ◽  
The Business Cycle ◽  
Recent Financial Crisis ◽  
The Interest Rate ◽  
Excessive Risk Taking

The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically. (JEL E32, E43, E44, E52, G01, G21, G28)

Bank regulatory capital and liquidity creation: evidence from BRICS countries

2018 ◽  
Vol 13 (1) ◽  
pp. 218-230
Author(s):  
Muhammad Umar ◽  
Gang Sun ◽  
Khurram Shahzad ◽  
Zia-ur-Rehman Rao
Keyword(s):  
Emerging Economies ◽  
Risk Taking ◽  
Design Methodology ◽  
Econometric Model ◽  
Bank Capital ◽  
Least Squares Regression ◽  
Regulatory Capital ◽  
Content Type ◽  
Brics Countries ◽  
The Relationship

Purpose The purpose of this paper is to explore the relationship between bank regulatory capital and liquidity creation in banks of BIRCS countries. Design/methodology/approach Data from all publicly listed banks of BRICS nations for the period 2003-2014 have been collected and analyzed. Two-stage least-squares regression has been used to control endogeneity. The econometric model includes different control variables that have been selected based on the extant literature. Findings Increase in bank capital negatively affects bank liquidity creation which implies that “financial fragility-crowding out” hypothesis holds for banks of BRICS countries. Originality/value This study provides the evidence of the inverse relationship between bank regulatory capital and liquidity creation from emerging economies. The findings show that there is a trade-off between curtailing bank risk taking and liquidity creation. Therefore, the regulators must formulate policies to strike a balance between the two.

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