Commercial bank capital and risk in India: Does financial crisis matter?

Abstract

This study investigates the relationship between bank capital and risk in the Indian banking sector. The sample consists of 68 commercial banks including public-sector banks, private-sector banks and foreign banks. We employ panel granger causality test to find out the relationship between risk and capital. The result signifies that there is a unidirectional causality, i.e. risk is causing capital for all the three types of commercial banks. Furthermore, we examine the impact of risk on capital with some bank-specific variables and regulatory pressure as control variables using generalised method of moments (GMM) technique. The results reveal that bank risk, bank-specific variables and regulatory pressure are significantly affect the bank capital, and the results vary across the ownership of the banks. Finally, we examine the impact of risk on bank capital between with and without financial crisis period. We find that risk is positively affecting the bank capital ratio under both periods in the case of public-sector banks, but the rate of change is more on with financial crisis period than without crisis period. The impact of risk on bank capital has been highest for the private-sector banks.

Keywords

• bank capital
• risk
• panel granger causality
• generalized method of moments
• financial crisis