Examining the Relationships between Capital Ratio, Credit Risk, Capital Buffer and Prudential Regulation in Tunisian Banking

Hichem Maraghni, Mohamed Tahar RAJHI


We try to examine the simultaneous effect between the variations of capital ratio and the level of credit risk-taking to a sample of Tunisian universal banks under regulation. To do this, we have estimated a structural model in double simultaneous equations with a panel data over a period from 1990 till 2012, then under both period between 1990/2000 and 2001/2012 by using 3SLS estimation. The standards regulatory terms aim to limiting the risk-taking of credit, liquidity, market and operational and supervise the banking activity by limiting their involvement in riskier activities. The results show first, that regulatory constraints on the requirement of bank capital in Tunisia exhibit no incidents on the behavior of credit risk incentive. This institutional pressure is negatively associated with the capital ratio level essentially over the period 2001-2012. In addition, we found that Capital Buffer is negatively related, in a significant degree, to the level of capital ratio of these banks. These findings were similar to those in the contributions of Dahl and Shrieves (1992) Godlewski (2005), Lindquist (2004), Dionne (2006), and Wedow Stolz (2009) and those more recently such as Jokipii and Milne (2010), Maurin and Toivinen (2012). However, the simultaneous effect between the change in the level of capital and incentives to the credit risk is negative and statistically significant over the entire period of analysis. The change in the level of capital has significant and rapid impact on the level of credit risk incentive. These banks modulate their capital ratio, primarily, based on the magnitude of the risk of insolvency of their credit portfolio.

Keywords: Bank regulation, Credit risk, Capital ratio, capital buffer, Basel II and III.

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ISSN (Paper)2222-1905 ISSN (Online)2222-2839

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