Capital, Risk and bank regulation in Brazil.

Abstract

This paper investigates assumption that an increase in capital ratio can lead to lower risk-taking and explain why Brazilian banks keep more capital than minimum regulatory requirement. Results indicate that an increase in capital ratio lead to higher portfolio risk, reinforcing Koehn and Santomero (1980) and Kim and Santomero (1988). Furthermore, shows that capital buffer is the main variable to explain the high capital level in Brazilian banks. Therefore, this article signaling the high capitalization level does not imply, necessarily, that the financial system will be stronger to face financial crises.