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BANK CAPITAL AND RISK IN THE SOUTH EASTERN EUROPEAN REGION

  

Panayiotis P. Athanasoglou

Bank of Greece

 

Abstract

This paper examines the simultaneous relationship between bank capital and risk. A model is set up which assumes that banks’ decisions regarding capital and risk are made endogenously in a dynamic pattern. A simultaneous equation system was estimated using an unbalanced panel of SEE banks from 2001 to 2009. A key result for the whole sample of banks is the relationship between regulatory (equity) capital and risk which is positive (negative). However, a positive two-way relationship between regulatory capital and risk was found only in less than-adequately capitalized banks, which also increased substantially their risk in 2009. Thus, banks’ decisions differentiate between equity capital and risk and regulatory capital and risk. A positive, significant and robust effect of liquidity on capital was identified. Both regulatory and equity capital exhibit procyclical behavior, whilst the relationship between risk and rate of growth of GDP is ambitious.

 

Keywords: Banking, capital, risk, liquidity, regulation, dynamic panel estimation

JEL Classification: C33, G21, G32

Acknowledgements: The author would like to thank Heather Gibson and Ioannis Daneilidis and participants in the 2010 ENG-EPA international conference on “Global trends in the efficiency and risk management of financial services” and the 4th (2010) SEE Economic research workshop hosted by the central bank of Albania (Tirana) for helpful comments. The views expressed in this paper do not necessarily reflect those of the Bank of Greece.

 

 

Correspondence:

Panayiotis P. Athanasoglou

Economic Research Department

21 E. Venizelou, Bank of Greece

10250 Athens, Greece

Tel: +30-210-3202449

E-mail: pathanasoglou@bankofgreece

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