Bank Capital Regulation and Risk Taking

Banking is one of the most regulated industries. The arguments for an extensive regulation of the banking industry are rooted in the importance of banks in financing economic development and the economic costs associated with financial instability in the banking system. In order to design an adequate regulatory framework that ensures financial stability it is decisive to understand the impact of regulation on banks' risk taking. As a starting point, I review the literature on the various instruments of bank regulation with a particular focus on capital regulation. In chapter 3, I provide the reader with a description of the banking system and the regulatory framework in Germany. Chapter 4 examines the role of banks' capitalization for their lending supply. I find that weak capitalization of banks did not slow down lending supply. In chapter 5, I analyze the impact of minimum capital requirements under Basel 2 on bank lending to emerging markets. The results confirm that bank lending will not be subject to dramatic shifts due to a reform in capital regulation.