Basel II Capital Requirements and Bank Behaviour: Empirical Evidence from Brazilian Banks

Journal of Finance and Investment Analysis, Volume.4, Issue.2, pp.21-39

Posted: 18 Mar 2015 Last revised: 6 Mar 2016

See all articles by Hiep Luu

Hiep Luu

University of St. Andrews

Date Written: March 17, 2015

Abstract

This paper provides an empirical investigation on the relationship between Basel II capital requirement and the risk-taking behaviour of banks in Brazil. Building on previous studies, two econometric models were employed: the simultaneous equations model of Shrieves and Dahl (1992), and the model for bank portfolio behaviour developed by Berger and Udell (1994). In our sample of Brazilian banks, we found sufficient evidence that Basel II induced banks to increase their capital adequacy ratio. Meanwhile, banks capital and risk-taken levels appeared to be negatively related, indicating that an increase in capital adequacy ratio did lead to a reduction in level of risk banks undertake. Besides, there was no empirical evidence of moral hazard in the way Brazilian banks behaved. Nonetheless, the study also pointed out that the implementation of Basel II had contributed to a reduction in domestic credit in Brazil, and thus, it might have an adverse effect on the country’s economy.

Keywords: Basel II, Capital Adequacy Ratio, Risk-taken level

JEL Classification: C33, G21, G28

Suggested Citation

Luu, Hiep, Basel II Capital Requirements and Bank Behaviour: Empirical Evidence from Brazilian Banks (March 17, 2015). Journal of Finance and Investment Analysis, Volume.4, Issue.2, pp.21-39 , Available at SSRN: https://ssrn.com/abstract=2579627

Hiep Luu (Contact Author)

University of St. Andrews ( email )

The Gateway, North Haugh, St Andrews
St Andrews, Fife KY16 9SS
Great Britain

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