This paper analysed the effect of risk-weighted capital regulation policies on bank risk-taking behaviour in Kenya. The dynamic system Generalized Method of Moments (GMM) model was invoked to estimate plausible models, using a balanced panel data of 30 commercial banks for the period 2011‒2018. The main findings of this study suggest significant changes in capital regulations incentivize banks to make fast portfolio adjustments, particularly if they are capital restricted. Bank capital, on the other hand, is a necessary but insufficient criterion for a bank’s stability and solvency. Effective capital regulations may be very hard to achieve in countries where accountability, deterrence, and transparency are severely lacking. Therefore, to ensure the efficacy, the Kenyan Government must address the institutional shortcomings that exist in order to meet regulatory capital requirements. This can also apply in the prevailing COVID-19 pandemic that has brought economic consequences which are bound to last much longer, requiring monetary authorities to devise effective policy interventions such as liquidity support, borrower assistance, and monetary easing.
