Regulatory Pressure and Bank Capital and Risk Behavior in Pakistan

This study addresses how banks specifically undercapitalized commercial banks in Pakistan adjust capital and portfolio risk, in the light of regulatory pressure during the period of 2004-2014. The results show that due to regulatory pressure, undercapitalized banks are not increasing their capital. Large investments in government securities imply that all banks are risk averse and to comply with the regulatory requirements they are increasing their risk free investments in assets portfolio. It is also found that there is a one way inverse relationship between capital and portfolio risk, runs from capital to risk only. This research will help policy makers to understand the capital and portfolio risk behavior of undercapitalized banks and policy makers will seize an opportunity to devise strategies accordingly, to support the economic activity through channeling the liquidity to businesses.