An empirical study of the capital requirements and bank behaviour : evidence for Maltese banks

Abstract

In recent years, regulators have "increased their focus on the capital adequacy of banking institutions"(Rime 2001, Rime 2001)(Matejasák M., Petr T. 2007) with the specific aim of enhancing their stability, hence the stability of the whole financial system (Rime 2001)(Matejasák M., Petr T. 2007). The purpose of this dissertation is thus to assess and judge how banks operating in the local Maltese market adjust their level of capital and portfolio risk under capital regulation, and whether and how they react to the constraints placed by the regulators (Rime 2001)(Matejasák M., Petr T. 2007). In order to do this, the researcher used variables from the estimated modified version of the model developed by (Shrieves, Dahl 1992)(Matejasák M., Petr T. 2007), and used correlation analysis to analyse the results. Results will then enable the researcher to establish whether regulatory requirements have the desired effect on bank behaviour (Matejasák M., Petr T. 2007). This analysis mainly delves through some theories that try to explain bank behaviour toward capital requirement, but focus mainly on the Capital buffer theory and the Moral hazard theory. The researcher will then attempt to ascertain whether these theories are in line with the Maltese Banking behaviour. This research in fact demonstrated that both theories are in line with the obtained results; however the findings went against literature proposing that regulation led to an economic downturn. Several conclusions were drawn through this study, which will be further explained in the prevailing chapters.