| Summary: | Capital regulation represents the core of prudential regulation
in banking. Despite the aim of the regulators to have a safer and
more robust banking industry, the effects of capital regulation
on banks’ capital and risk decisions appear ambiguous. The paper
analyses the relationship between capital and risk changes and
the impact of regulatory pressure for a sample of European banks
during the period 2006–2010, which encompasses the start of the
latest financial crisis. Results highlight that banks tend to adopt
a different behaviour depending on the capital ratio considered,
supporting the so-called ‘gamble for resurrection’ hypothesis. Evidence supports the rethinking of the regulatory framework, especially
with reference to higher and stricter capital requirements.
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