Capital regulation and bank risk-taking - new global evidence

This study investigates the link between capital regulation and bank risk-taking. Using a sample of over 1,800 banks in 135 countries, I find that the relationship between capital regulation and bank risk-taking (measured by z-score) is an inverse 'U' shape. That is, as capital ratios increase, a bank will take less risk initially, then more risk. These results are robust to numerous additional tests, including estimation methods. I also find that more stringent regulations mitigate the effect of higher capital on lowering bank risk-taking. Increased capital requirements, even when risk-based, induce risk-taking at higher levels, irrespective of whether banks are well- or under-capitalised.