Capital Regulations and Financial Institutions: Reflections from Theory and Evidence.

Abstract

In recognition of the important role banks play in any economy, numerous researches have been undertaken on how these institutions should be regulated. For example, researches on capital requirements have indicated that the capital base of a bank is vital for the protection of its creditors (its depositors) and hence for the maintenance of general confidence in its operations and the underpinning of its long-term stability and growth. Other researches have addressed the deposit insurance schemes as well as reserve requirements and their effects on the risk taking behaviour of banks. The principle objective of this paper is to review the current literature on capital regulations with the intent of exploring the implications of banking theory for optimal regulation. Results suggest that there are mixed arguments about capital regulations and its effects to banks' risk taking behaviour. It is inconclusive as to whether or not risk based capital requirement increases incentive for banks to take risks.


African Journal of Finance and Management Vol.8(1) 1999: 21-27