Prudential regulation and banking risk: impact of the structure and level of regulatory capital.

Summary The objective of this thesis is to assess the impact of capital regulation on bank risk. We contribute to the literature in three ways. First, we consider the level of regulatory capital initially held by banks as well as the type of capital chosen to increase this level. Second, we study the appropriateness of introducing a requirement on the non-risk weighted capital ratio in Europe. In the first chapter of the thesis, we present the financial structure of banks and analyze the different channels through which capital regulation influences banks' risk taking, by reviewing the theoretical and empirical literature. We highlight the lack of consensus regarding the impact of capital requirements on bank risk. The second chapter is devoted to the study of the impact of capital changes on the risk-taking of European banks, taking into account the "ex ante" level and the different components of regulatory capital. We find, first, that highly capitalized and adequately capitalized banks take more risk when they increase their capital. Moderately undercapitalized banks behave conservatively, while severely undercapitalized banks bet for resurrection by taking more risk. We then show that moderately undercapitalized banks reduce their risk taking only when they increase their capital. Conversely, an increase in subordinated debt and hybrid capital generally leads to higher risk taking, regardless of the bank's initial capital level. In the third chapter, we assess the impact of risk-weighted and unweighted capital ratios on the default risk of European banks, taking into account market discipline The results show that an increase in risk-weighted capital ratios leads to a decrease in default risk Conversely, unweighted risk-weighted capital ratios are associated with a higher default risk for unlisted banks