Banking Regulation And The Basel Accords: A Comparative Investigatıon On Capital-Risk Relationship in Turkey And Waemu

Abstract

Following the development of the Basel Accords, posited as the benchmark regulatory standards in global banking system, investigations to examine the impact of capital requirements on bank risk-taking behaviors aroused a substantial interest. Indeed, despite a significant amount of research carried out, and since both theoretical and empirical findings yield mixed evidence, the debate is yet to be settled. Yet, the prior empirical investigations often failed to connect the issue to the type of the Basel Accords implemented. Since the implementation constraints of capital requirements may widely vary between BCBS member- and non-member BCBS countries, this dissertation aims to examine the capital-risk interrelationship in both Turkey and WAEMU banking systems through a comparative analysis. More specifically, the study compares the trends of the capital-risk relationship in Turkish banking industry to that of the WAEMU. It also gauges the impact of change in capital regulatory standards following the implementation of more stringent regulatory rules and changes in membership status on the capital-risk relationship. Using the three-stage least squares estimations in the framework of Simultaneous Equations Modelling as developed by Shrieves & Dahl (1992), the findings reveal a negative association between bank risk-taking behaviors and flat capital ratio (CAP) for the time span 2002-2006, implying that banks in Turkey and WAEMU with low risky assets portfolios hold high equity capital positions when subject to the Cooke ratio. In the period 2007-2015, the unweighted capital ratio was irrelevant to explain risk-behaviors for both Turkish and WAEMU’s banks while risk-based capital ratio became a relevant indicator for risk profile of banks in Turkey, indicating that banks with higher level of risky investments hold higher capital positions. The study also confirms that changes in regulatory standards in Turkey from 2007 have affected the trends of capital-risk relationship. Yet, change in membership status does not affect capital positions but rather reduces risk-taking behaviors of banks in Turkey. Finally, the findings show that banks specific features (size, profitability, liquidity, and off-balance sheet activities) and macroeconomic indicators (inflation and GDP growth) also affect capital adjustments and bank risks.