Do capital adequacy requirements reduce risks in banking?

In a dynamic framework it is shown that capital adequacy rules may increase a bank's riskiness. In addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered. The intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank. If raising equity is excessively costly, the only possibility to increase equity tomorrow is to increase risk today. (C) 1999 Elsevier Science B.V. All rights reserved.