Risk-based Capital, Portfolio Risk, and Bank Capital: A Simultaneous Equations Approach

Document Type



Published by Elsevier in the Journal of Economics and Business, volume 49 issue 6, 1997. Bryant users may access this article here.


This paper examines the impact the risk-based capital standards had on bank capital and portfolio risk during the first year the risk-based standards were in effect. To date, insufficient attention has been focused on how the risk-based capital standards have impacted bank capital and risk. Building on previous research, this study used a three-stage least squares (3SLS) model to analyze the relationship between bank capital, portfolio risk, and the risk-based capital standards. The results suggest that the risk-based capital standards were effective in increasing capital ratios and reducing portfolio risk in commercial banks.