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Capital Requirements and Bank Behaviour in Mauritius

In this paper, we provided some evidence on the effects that the basel risk based capital requirements on bank capital and risk ratios in Mauritius. In spite of the broad spectrum confession that capital regulations may have different effects on bank behavior, according to the background of each bank, still we observe that bank capital regulation did not achieve the primary goal of increasing capital ratios of banks, which contradicts the existing empirical evidence of several developed countries during early 1990s. Nor does it have an influence on risk of banks, notwithstanding the fear that banks would involve in riskier projects as a result of such regulations.Per our Three Stage Least Squares regression, we also found that there existed no simultaneity between capital and risk ratios, which is in line with our expectations as capital and risk decisions are taken separately by the banks. GMM estimates were also in line with the behaviour of Mauritian Banks in the post basel period. The only factor that explained significantly changes in risk ratios was return on assets as banks were using a greater proportion of their profitability to reduce their credit risks by employing experts in credit risk management. We also found that banks were faced with excess liquidity in the estimation period such that the excess liquidity were used to finance investment in bills and credit without affecting capital and risk ratios of the banks.