Regulation, bank capital, and bank risk: evidence from the Lebanese banking industry

This paper analyzes the relationship between change in capital and change in risk for a sample of 23 Lebanese banks between 2009 and 2014. Using the simultaneous equations model, our evidence reveals that banks determine their capital and risk levels simultaneously, with a negative relationship. Whi...

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Bibliographic Details
Published inJournal of banking regulation Vol. 21; no. 3; pp. 241 - 255
Main Author El-Khoury, Rim
Format Journal Article
LanguageEnglish
Published London Palgrave Macmillan UK 01.09.2020
Palgrave Macmillan
Subjects
Banking
Banking industry
Banks
Capital requirements
Economics and Finance
Finance
Financial Law/Fiscal Law
Original Article
Risk management
Lebanon
Lebanon
Bank capital
Regulation
Risk taking
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Summary:This paper analyzes the relationship between change in capital and change in risk for a sample of 23 Lebanese banks between 2009 and 2014. Using the simultaneous equations model, our evidence reveals that banks determine their capital and risk levels simultaneously, with a negative relationship. While banks adjust their capital rapidly, they adjust their risk slowly. Furthermore, undercapitalized banks adjust their capital levels more rapidly than well-capitalized banks, and they increase their capital when they decrease their risk. However, there is no conclusive evidence regarding the role of regulatory pressure in driving risk-taking behavior. Finally, there are no major differences in the relationships between capital and risk regardless of whether banks are listed or not.
ISSN:1745-6452
1750-2071
DOI:10.1057/s41261-019-00111-2