The impact of prudential regulation on bank capital and risk-taking: The case of MENA countries

Abstract

The main purpose of this paper is to assess the simultaneous impact of regulatory pressures on banks’ capital and risk-taking behavior using a panel of 24 banks operating in the MENA region over the period 2004–2012. Using many panel data estimation techniques, we provide evidence that prudential regulations fail in reducing banks’ risk-taking incentives and in increasing capital. We find also that bank profitability is positively associated with capitalization level suggesting that the underdevelopment of financial markets in MENA countries leads banks to rely more on internal resources to build their capital buffer. Our findings reveal also a strong negative relationship between the bank size and risk suggesting that large banks have more experience in managing their risk levels through diversification.