After the eruption of the global financial crisis, the banking sector has gone
through profound regulatory reforms aimed at strengthening the stability of
the entire financial system. Based on a sample of 62 listed banks in the European Economic Area Region, during the period 2005q1-2018q4, this paper
investigates the impact of capital policies on bank risk-taking. Results show
how the Tier 1 capital ratio and the Tier 1 leverage ratio represent a crucial
factor in explaining bank risk, especially for small banks and during financial
turmoil periods. Additionally, we find that the introduction of mandatory
disclosure of the Tier 1 leverage ratio and the Tier 1 capital ratio reduced the
bank risk-taking of higher leveraged and capitalized banks. Our findings have
significant implications for both the banking industry and policymakers alike.
