In this dissertation we investigate different aspects of capital regulations and their impact on the behavior of commercial banks. In chapter two, we foucs on the impact of capital regulations on risk-taking of commercial banks in developed and developoing countries separately and togahter. We find that such regulations indeed reduce the risk taking of commercial banks. At the same time, we examine the relationship between capital ratios and risk taking. In line with previous literature, we find that this ratio is negative also. Further examinations including the degree of liberalization and the level of finanicl development did not yield conclusive results. In chapter three, we examine the relationship between the capital regulations and total lending and total depositis. We do not find conclusive evidence in support of the ‘credit crunch' or the ‘ risk retrenchment' hypothesis. However, several important variables do show a tendency to change with capital ratios. As a result, changes in capital ratios in response to regulations do have important impact on bank lending and decision making. In chapter four, we study five South East Asian countries within the context of the crisis of 1996. First we test for the existence of depositor discipline in these countries and find that the sate of such discipline is very weak even after such a huge crisis. We also test the degree of risk taking in the banking industry in these countries. Evidence shows that perfect competition prevails in the bankins secotr. We also try to establist the link between "the index of depositor discipline" and "index of competition". But we don't find evidence in support of this.

Banking has a unique role in the well-being of an economy. This role makes banks one of the most heavily regulated and supervised industries. In order to strengthen the soundness and stability of banking systems, regulators require banks to hold adequate capital. While credit risk was the only risk that was covered by the original Basle Accord, with the 1996 amendment, banks have also been required to assign capital for their market risk starting from 1998. In this research, the impact of the market risk capital regulations on bank capital levels and derivative activities is investigated. In addition, this study also evaluates the impact of using different approaches that are allowed to be used while calculating the required market risk capital, as well as the accuracy of VaR models. The implementation of the market risk capital regulations can influence banks either by increasing their capital or by decreasing their trading activities and in particular trading derivative activities. The literature review concerning capital regulations illustrates that in particular the impact of these regulations on bank capital levels and derivative activities is an issue that has not yet been explored. In order to fill this gap, the changes in capital and derivatives usage ratios are modelled by using a partial adjustment framework. The main results of this analysis suggest that the implementation of the market risk capital regulations has a significant and positive impact on the risk-based capital ratios of BHCs. However, the results do not indicate any impact of these regulations on derivative activities. The empirical findings also demonstrate that there is no significant relationship between capital and derivatives. The market risk capital regulations allow the use of either a standardised approach or the VaR methodologies to determine the required capital amounts to cover market risk. In order to evaluate these approaches, firstly differences on bank VaR practices are investigated by employing a documentary analysis. The documentary analysis is conducted to demonstrate the differences in bank VaR practices by comparing the VaR models of 25 international banks. The survey results demonstrate that there, is no industry consensus on the methodology for calculating VaR. This analysis also indicates that the assumptions in estimating VaR models vary considerably among financial institutions. Therefore, it is very difficult for financial market participants to make comparisons across institutions by considering single VaR values. Secondly, the required capital amounts are calculated for two hypothetical foreign exchange portfolios by using both the standardised and three different VaR methodologies, and then these capital amounts are compared. These simulations are conducted to understand to what extent the market risk capital regulations approaches produce different outcomes on the capital levels. The results indicate that the VaR estimates are dependent upon the VaR methodology. Thirdly, three backtesting methodologies are applied to the VaR models. The results indicate that a VaR model that provides accurate estimates for a specific portfolio could fail when the portfolio composition changes. The results of the simulations indicate that the market risk capital regulations do not provide a `level playing field' for banks that are subject to these regulations. In addition, giving an option to banks to determine the VaR methodology could create a moral hazard problem as banks may choose an inaccurate model that provides less required capital amounts.

The banking industry in India has undergone many phases in its history; evolving from a regulated, decentralised system in the early 1800’s, to a regulated, centralised system during British rule, to a nationalised system following India’s independence, and finally a combination of a nationalised and private system adopting global standards as it currently stands. This study has two main aims. Firstly, it will assess the relationship between the firm-specific determinants of capital structure, based on the prevailing literature, and the capital structure of public and private sector banks in India. Secondly, it will determine whether there is a difference in the firm-specific factors that contribute to the determination of the capital structure of public sector banks and private sector banks. This study adopts quantitative methods, similar to previous studies on the relationship between capital structure and its firm-specific determinants. The dependent variable, being total leverage, is regressed against multiple independent variables, being profitability, growth, firm size and credit risk (hereinafter referred to as “risk” unless otherwise indicated) in a multivariate linear regression model. This study adds to the current literature by applying the same firm-specific independent variables to the case of private and public sector banks and then to evaluate and compare the similarities and differences between the regression outputs. The results show that for private sector banks, all independent variables are statistically significant in explaining total leverage, where all the independent variables conform to the current literature on capital structure – profitability (-), firm size (-), growth (+) and credit risk (-). Conversely, for public sector banks, all independent variables were considered to be statistically significant, except for credit risk – profitability (-), firm size (+) and growth (+). These results imply that credit risk is not an important determination in a nationalised banks’ capital structure; thus, providing evidence for the moral hazard theory of public sector banks.