Abstract:

The regulators attempt to increasingly focus on the adequacy of the capital belonging to banking institutions in order to enhance the overall stability of the financial system. The crucial role of banks in maintaining the growth of the economy and their feasible contributions when it comes to economic failures, leads the Basel Committee on Banking Supervision (BCBS) to sufficiently concentrate on regulations of the banking sector. Thus the regulatory pressure has gradually been increased over the years with the aim of moving towards best international practices. In this context, the objective of the study is to investigate how banks specifically undercapitalized commercial banks in Pakistan adjust capital and   portfolio risk in the light of regulatory pressure during the period of 2004-2014.The secondary data comprises all commercial public sector, private sector and foreign banks of Pakistan and yearly data has been collected from bank scope data base and State Bank of Pakistan from 2004 to 2014. Simultaneous Equations Model has been estimated by using two step Generalized Method of Moments (GMM).The results show that due to regulatory pressure, undercapitalized banks are not increasing their capital but are merged with other banks.