PN 2020-09
Are Marine-protected Areas Sheltered from Plastic Pollution?
RPS 2020-05
Assessment of the Free Irrigation Service Act
Exploring Teachers' Whys: Understanding Motivation Among Teachers in the Philippines
PSR JA 2015-810
Kinship Networks and Resiliency to Flooding of Pagatban Riverside Communities in Negros Oriental
Publication Detail
BSP WPS 2019-01: Do Capital Regulations Influence Banks' Holding of "Excess" Capital?

This study examines the moral hazard and capital buffer theories as motivations of Philippine banks in managing their capital and risks following the adoption of Pillar 1 of the Basel III framework on minimum capital requirement. Using the empirical model of Heid et. al (2004) and Malovaná (2017), the results of the study indicate that most banks adjust their regulatory capital ratio by optimizing their portfolio risk through changes in the level of capital. Banks do not have the tendency to immediately adjust their risk-weighted exposures but are more inclined to maintain a reasonable balance between changes in the size of their assets and capital. Moreover, banks that have lower capital ratios relative to their peers have higher tendency to adjust their capital ratio. The capital buffer theory likewise holds true, that is, banks with low capital buffers rebuild an appropriate level of buffer by decreasing their risk exposures while banks with high capital buffer are inclined to simply maintain their capital ratio when these banks increase their risk exposures. Another interesting finding of the study is that the adoption of minimum capital requirement did not result in moral hazard problem rather banks have become more risk-sensitive. In particular, banks try to rebuild an appropriate buffer by raising their level of capital while simultaneously lowering risk. The results are robust against diagnostic tests, different specifications of the model and alternative estimation method.

Bangko Sentral ng Pilipinas
Authors Keywords
Layaoen, Cherry Wyle, G.; Domantay; Vernalin Grace, F. ; minimum capital requirement, level of capital, risk-weighted exposures, risk-sensitive capital, regulatory capital;
Download PDF Number of Downloads
Published in 2019 and available in the or can be downloaded as full text Downloaded 614 times since July 15, 2020