THE IMPACT OF REGULATORY PRESSURES ON CAPITAL AND PORTFOLIO RISK: AN EMPIRICAL STUDY OF THAI COMMERCIAL BANKS
Keywords:
Capital Regulation, Risk-Based Capital, Portfolio Risk, Basel I, Moral Hazard, and Thai Commercial BanksAbstract
Policy makers maintain financial stability focusing on banks’ financial solvency strengthening. The implementation of regulatory capital minimum requirement, namely, the Basel I Capital Accord has brought about controversy among theorists and practitioners whether the regulation enhances capitalization and portfolio risk mitigation, or it increases leverage, and hence excessive risk taking arisen from moral hazard problem. This study empirically investigates the impact of regulatory capital standard on Thai commercial banks using Generalized Method of Moments (GMM) for simultaneous equations estimation on the panel data. As existed in the literature, the main focus of the estimates is on variables of three dummy regulatory standards including: Prompt Corrective Action (PCA) based, PCA advanced, and capital volatility approaches. The results show that the regulatory capital requirement induces Thai commercial banks to adjust their capital and portfolio risk. The relationship between banks’ capital and risk is negatively related.
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