Banks are in the business of taking risk. Given the nature
of services that they provide, they are naturally placed
for financial resources as deposits keep flowing in. The
task gets complicated, as banks have to continuously deploy
these resources to generate returns. On the asset side,
the hunt is continuously on for quality assets, which are
generally scarce in supply. On the other hand, quality assets
being low risk also generate low returns. In order to generate
higher returns, banks diversify into riskier areas. Taking
this into cognizance, Basel II has provided the overall
risk management framework within which banks are to operate
and Reserve Bank of India has issued guidelines in this
regard.The relation between risk and capital has been well
established and the guidelines deal in detail on this aspect.
Concepts like economic capital, regulatory capital, RAROC,
Probability of Default (PD), Exposure at Default (EAD) and
Loss Given Default (LGD) have become common terminology.
In a recent paper, Datta Chaudhuri (2007a) has tried to
estimate the relationship between risk-taking and capital
among public sector banks and private sector banks. The
paper developed a model in which the simultaneous relationship
between risk and capital has been postulated.
In this paper,
we present some data on specific variables used in the study
and show whether there is any difference between their magnitude
between private sector banks and public sector banks. This
in line with the quest in Datta Chaudhuri (2007b) study
wherein attempts have been made to functionally distinguish
between public sector and private sector banks. It has been
shown that private sector banks enjoy a higher P/E than
public sector banks, although operating parameters are not
that significantly different. This article pursues a similar
objective. We also try to examine the movement of these
variables over time.
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