Does Capital Regulation Matter for Bank Behavior? Evidence for German Savings Banks

35 Pages Posted: 9 May 2004

See all articles by Stéphanie Stolz

Stéphanie Stolz

International Monetary Fund (IMF); European Central Bank (ECB)

Frank Heid

Deutsche Bundesbank

Daniel Porath

University of Applied Sciences Mainz

Date Written: December 2003

Abstract

The aim of this paper is to assess how German savings banks adjust capital and risk under capital regulation. We estimate a modified version of the model developed by Shrieves and Dahl (1992). In comparison to former research, we impose fewer restrictions with regard to the impact of regulation on capital and risk adjustments. Besides, we complement our analysis with dynamic panel data techniques and a rolling window approach.

We find evidence that the coordination of capital and risk adjustments depends on the amount of capital the bank holds in excess of the regulatory minimum (the so-called capital buffer). Banks with low capital buffers try to rebuild an appropriate capital buffer by raising capital and simultaneously lowering risk. In contrast, banks with high capital buffers try to maintain their capital buffer by increasing risk when capital increases.

Keywords: Bank regulation, risk taking, bank capital

JEL Classification: G21, G28

Suggested Citation

Stolz, Stephanie and Heid, Frank and Porath, Daniel, Does Capital Regulation Matter for Bank Behavior? Evidence for German Savings Banks (December 2003). Available at SSRN: https://ssrn.com/abstract=493723 or http://dx.doi.org/10.2139/ssrn.493723

Stephanie Stolz (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Frank Heid

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Daniel Porath

University of Applied Sciences Mainz ( email )

An der Bruchspitze 50
Mainz 55122
Germany

HOME PAGE: http://www.fh-mainz.de/index.php?id=5726&lastArticle=4692&cHash=b12d1fc2e8#4692

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