Bank Regulation, Capital Ratio Behaviour and Risk Taking in a Simultanious Approach

Abstract

We try to look for an answer to the simultaneous impact of changes in capital ratio at risk taking incentive for Tunisian banks under regulation pressure. Our analysis is based on a structural model of two simultaneous equations, originally developed by Shrieves and Dahl (1992), and applied to ten Tunisian universal banks and covers the period from 1990 to 2012 by panel data. The results show firstly, that regulatory pressure led to the adoption of an adequacy required capital does not imply a decrease or an increase in the incentive in risk-taking and secondly that the institutional and legal mechanism shows a positive and significant effect on the level of capital ratio. Regulatory pressure seems to have the desired effect on the behavior of banks on the side of capital. Any change in the level of risk does not induce any effect on the level of capital ratio for all the period of our analysis. Tunisian banks have a preference for risk, but the effort of capitalization is still insufficient. This behavior confirm the existence of moral hazard in banks caused by the safety net and the assistance for the protection guaranteed by the Central Bank. Moreover, by strengthening their capital levels, these banks reduce significantly their incentive to take risks.