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Do Basel III Higher Common Equity Capital Requirements Matter for Bank Risk‐taking Behaviour? Lessons from South Africa
Author(s) -
Adesina Kolade Sunday,
Mwamba John Muteba
Publication year - 2016
Publication title -
african development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.654
H-Index - 32
eISSN - 1467-8268
pISSN - 1017-6772
DOI - 10.1111/1467-8268.12208
Subject(s) - capital requirement , basel ii , basel iii , equity (law) , economics , equity risk , risk adjusted return on capital , risk appetite , capital adequacy ratio , economic capital , risk weighted asset , equity capital markets , business , monetary economics , financial capital , risk management , finance , capital formation , private equity , economic growth , microeconomics , political science , profit (economics) , law , incentive , human capital
This paper examines the role of common equity capital in determining the risk‐taking behaviour of banks in South Africa. Using system GMM, the results show that higher common equity capital is associated with lower bank risk. Additionally, the results show that there is a negative and significant relationship between business cycles and bank risk, while the relationship between bank market power and risk is positive and significant. The findings remain robust after using alternative measures of bank risk. On the whole, this study recommends that an increase in common equity capital should be coupled with control of bank market power to achieve the goal of curtailing excessive risk appetite of banks.