Regulatory Capital Requirements and Risk-Taking Behaviour: Evidence from the Malawi Banking System
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Date
2021-07-12
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 is said to promote financial stability. Opponents of higher capital
requirements argue that capital adequacy rules might not enhance stability
but might in fact increase a bank's riskiness. The paper test 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.