Capital Adequacy Rules and the Risk-Seeking Behavior of Banks: A Firm-Level Analysis

Abstract

Economic theory is unclear on the effects of capital regulation on the risk-seeking behavior of banks. This paper attempts to shed light on the issue by examining the impact of the implementation of the guidelines of the 1988 Basle Capital Accord on a large sample of individual banks drawn from the signatory countries. The empirical methodology is based on the call option interpretation of firm equity stemming from BLACK/SCHOLES. The results provide little evidence that the implementation of the Basle guidelines increased the probability of bank failure.

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