Interrelationship Among Basel Capital Regulation, Risk, and Efficiency in Pakistani Commercial Banks

Abstract

This study examines the interrelationship among Basel capital regulations, risk, and efficiency of Pakistani commercial banks from 1997-2015. It uses the Generalized Method of Moments (GMM) technique from beginning of capital regulation in 1997 to 2015. We find that bank capital regulation reduces the bank risk. As far as the impact of capital regulation on bank efficiency is concerned, it reduces the bank efficiency. Our results also indicate that the effect of capital regulation on bank risk and cost efficiency is different for each of the Basel accords. Moreover, Basel II was more successful than Basel I in reducing the risk taken by banks, while its impact on the cost efficiency of banks was negligible.