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Capital requirements and bank behaviour: an empirical analysis of Indian public sector banks
Author(s) -
Ghosh Saibal,
Nachane D. M.,
Narain Aditya,
Sahoo Satyananda
Publication year - 2003
Publication title -
journal of international development
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.533
H-Index - 66
eISSN - 1099-1328
pISSN - 0954-1748
DOI - 10.1002/jid.947
Subject(s) - economics , capital requirement , capital adequacy ratio , capital (architecture) , economic capital , risk aversion (psychology) , multivariate statistics , public sector , panel data , risk adjusted return on capital , value (mathematics) , monetary economics , business , financial capital , financial system , econometrics , financial economics , capital formation , microeconomics , human capital , economy , economic growth , mathematics , statistics , expected utility hypothesis , profit (economics) , archaeology , history , incentive
Consequent upon the introduction of prudential norms as an integral part of financial sector reforms, the present paper investigates the relationship between changes in risk and capital in the Indian banking sector. A dynamic, multivariate panel regression model is formulated wherein changes in capital ratio depend on its lagged value, a range of conditioning variables and regulatory dummies. Our analysis reveals that: (i) the regulatory framework needs to be designed to encourage individual banks to maintain higher than stipulated capital levels to reflect their differential risk profiles; and (ii) there is no conclusive evidence of risk aversion among Indian banks. Copyright © 2003 John Wiley & Sons, Ltd.