The role of regulatory pressure in banks’ capital and risk decisions

Capital regulation represents the core of prudential regulation in banking. The effects of capital regulation on banks’ capital and risk decisions appear ambiguous, according to previous empirical contributions. This study examines the behaviour of European banks in terms of capital and risk decisions during the period 2006-2010, which encompasses the boost and development of the latest financial crisis. The analysis focuses on the determinants of capital ratio and risk changes and on the role of regulatory pressure. Results highlight that banks tend to adopt a different behaviour depending on the capital ratio considered.