EMANES Working Paper No 58

The paper analyses the effect of regulatory pressure on bank behaviour, using a sample of Tunisian banks covering the period 2005-2020. Firstly, the paper examines the impact of regulatory capital on bank profitability and risk. Secondly, it contributes to the literature which has received scant attention from researchers investigating the nonlinear impact of regulatory pressure on bank behaviour. Thirdly, we consider different determinants of bank profitability and risk. Finally, we use both static and dynamic models to test for the persistence of bank profitability and risk, as well as to make sure that the results are not biased by endogeneity. The results suggest that regulatory capital pressure improves bank profitability and stability. This effect is, however, conditioned by the existence of a certain threshold, after which stringent capital regulation may have adverse effects. Our results have important policy implications on optimal bank capital regulation.

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