AN ASSESSMENT OF BANK CAPITAL EFFECTS ON BANK-RISK-TAKING IN PAKISTAN

This study examines the empirical impacts of capital-level on risk-taking behaviour of banks in Pakistan, using the bank-level panel data covering the period 2006 to 2015. It also explores the impacts of bank-size, profitability and the interest/financing rate on banks risk-taking. Panel co-integration test is applied to examine the presence of long-run relationship among the variables. Dynamic ordinary least square (DOLS) and the two-step system generalized method of moments are applied for estimation of the panel vector error correction model, to obtain the long-run and short-run estimates, respectively. Significant positive impact of capital on risk taking behaviour of banks was found. The short-run estimate, also shows that change in capital level is positively and significantly related to banks risk-taking. The positive capital effect on risk, suggest that banks with capital level above the regulatory requirements tends to invest more in risky assets. Findings of the study also reveal that bank-size has a negative impact on risk-taking; whereas, the interest rate is positively related to risk. Overall, the results are in line with finance theories and the existing empirical analyses on links between the capital and risk.

Key words: Risk-Taking, Capital Adequacy Ratio, Risky Assets, Profitability,
Bank Size; DOLS, Panel VECM, Co-integration, Long-Run Estimates.