Regulatory Capital Requirements and Risk Taking Behaviour: Evidence from the Malawi Banking System
Date
2021-11-16
Authors
Nkuna, Onelie Braineese
Matola, Marrium Mustapher
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
Proponents of stringent regulation argue in favour of higher capital requirements
as it issaid to promote financial stability. Opponents of higher capital requirements
argue that capital adequacy rules may not enhance stability but may in fact increase
a bank's riskiness. The paper tests this hypothesis with a dynamic panel data model
for eight Malawian commercial banks. Results reveal that there is high persistency
in risk-taking behaviour of Malawian banks. Further, the study finds that high capital
ratios reduce bank risk-taking behaviour of Malawian banks through reduction in Non Performing Loans (NPLs) ratio and investment in high risky assets. Based on these
results, imposition of stringent penalties on banks that fail to meet minimum capital
requirements and strict enforcement of regulation is key to ensuring that all banks
sustain sufficient capital buffers and hence safeguard stability of the banking system.