Risk-based capital standards and the riskiness of bank portfolios in Kenya: an empirical investigation

Abstract

Using empirical data from the Banking Industry in Kenya for the five-year period of 31st December 1998 to 31st December 2002, the research assesses the ex ante and ex post relationship between capital adequacy ratio and bank portfolio risk ratio following the introduction of risk-based capital standards in June 2000 in Kenya. It also assesses the responses of Kenyan Banks to regulatory developments related to bank capital. The research arrives at the conclusion that, at both the micro- and systemic levels, no evidence could be adduced that capital adequacy ratio had a strong influence on bank portfolio risk after introduction of RBC Standards in Kenya. The salient observation is also made that a preponderant number of banks in Kenya have responded to calls by the regulatory authorities (CBK) to meet absolute capital & capital adequacy requirements by boosting their levels of Tier I capital. However, notable exceptions in this regard include the Co-operative Bank, Kenya Commercial Bank and the perennially troubled National Bank of Kenya, all which augmented their respective total capital bases by injecting large quantum of subordinated debt ... i.e. Tier II capital