the ratio of Tier 1 + Tier 2 to total assets (Berger, 2014)
 
 
We control for the Capital
adequacy ratio (measured by Tier 1 plus Tier 2 capital to risk-weighted assets) because theory suggests that capital reduces moral
hazard incentives, and encourages monitoring incentives (e.g., Morrison and White (2005)). We expect an inverse relation
between capital and portfolio risk