Capital Regulation And Behavior Of Commercial Bank

The economic and financial researchers always focus on the issue of banking regulation. In recent years, with the promoting of Basel Capital Accord worldwide, capital regulation has become the core of banking supervision system internationally. The New Basel Capital Accord has been issued in 2004, which established minimum capital requirements, regulatory's supervisory and market discipline as the three pillars of banking regulation framework. The measurement methods of capital adequacy ratio become more scientific and forward-looking. The international standards of capital regulation entered a new stage. With the constant improvement of the capital regulation system, researchers start to study the effect of capital regulation on macroeconomy, commercial banks and firm development. The academic field formates a unique "Capital Channel ", which focuses on the level of banking supervision from a more microscopic perspective, enrich the theoretical framework of the study. In the past 20 years, a large number of research has been carried out on capital regulation.Compared with other countries, China implemented capital regulation only in 2004, in which Chinese regulatory introduced " The Rules of Capital Adequacy in Commercial Bank ". The gap of capital regulatory standards between China and foreign countries is very significant. The capital regulatory system still requires further improving. In order to narrow this gap, China has accelerated the reform process of state-owned commercial banks in recent years. The capital level,corporate governance structure and asset quality of state-owned commercial banks have been greatly improved through the reform, which create conditions for China to implement the new Capital Accord. According to the design of regulatory authorities, the big banks will implement the New Basel Accord. We expect that the gap between China and international capital standards will be narrowed further as the continuous adopting of the New Capital Accord. The capital regulation system is established on the bases of theoretical research, however, our academic theory and empirical research of capital regulation is not closely related to the practice of capital supervision. On the one hand, China has introduced the capital regulation system just for 6 years, it is very difficult to carry the empirical research due to the lack of micro data. China Banking Regulatory Commission promulgated "The Rules of Commercial Bank Disclosure Information " in 2007, who required commercial banks to improve the information disclosure mechanism, accept supervision from investors and the public. Under this new regulation, banks, especially city commercial banks and rural commercial banks reports revealed more important information from 2007, which offers us better environment for study the behavior of small and medium banks.This paper collects the financial data of 175 commercial banks from 1998 to 2009, mainly from bank annual reports and other databases. We study the effect of capital regulatory regime on commercial bank under the support of large sample data. In this paper, we focus on following two questions:Firstly, the regulatory has introduced the capital regulatory regime since 2004, hence, what is the effect of introducing capital regulation policy? We test the effectiveness of capital regulation system from the perspective of capital replenishment behaviour and risk-taking behaviour of banks.Secondly, there is a mixed effect on the behaviour of commercial banks after the implementation of minimum capital requirement. We study the capital constraint mechanism from the perspective of lending behaviour, interimediary business development and city bank's cross-region operation.This paper is organized as follows:Chapter 1 is introduction. It introduces the background and the definations, It also explains research focus and methodologies, framework as well as innovations and shortages in this paper.Chapter 2 constructs a theoretical framework of research on banking regulation. Firstly, we sum up the crisis-oriented theory of bank regulation from the aspect of evolution of the financial crisis. We argue that this theory has incorporate traditional government control theory into banking supervision framework, which neglects the essential nature of banks. Therefore, we introduce the need for government regulation from the bank of vulnerability and risk.Chapter 3 introduces the general framework for banking supervision system. We introduce the deposit insurance system, agency entry regulation, business entry regulation and market discipline respectively. Furthermore, we introduce the characteristics of the capital regulation system based on the Basel Capital Accord. Finally, we summed up the history and experience of Chinese capital regulation regime.In chapter 4 and chapter 5,1 test the effects of capital regulation regime from the perspective of capital replenishment behavior and risk-taking behavior. I construct simultaneous equations model,. It is found that capital regulatory pressure is positive correlated with capital replenishment, but negative correlated with risk-taking activity. Under the pressure of capital regulation, the under-capital banks add capital and reduce the risky assets ratio, the capital-adequacy banks reduce their capital ratio and increase risk assets ratio. The sub-sample test results show that capital regulation has limited impact on the behavior of bank's capital replenishment and risk-taking activity, which suggests that capital constra-int has not been established before 2004. However, the capital constraint has been established after 2004. Finally the sub-sample test results show that capital regulatory pressure have different impact on different types of commercial banks, capital constraint mechanism have large impact on the city and rural commercial banks, however, the effective is limited for state-owned and joint-stock commercial banks.The theory and empirical research shows that the new capital regulation regime has significant influence on bank's capital replenishment and risk-taking, the capital constraint after it was established in 2004.Chapter 6 studies the effect of capital constraints on commercial banks' lending behavior. Previous research has only focused on credit expansion due to data limitations.This paper expands the scope of the study and analyses the capital constraint effect from the perspectives of loan size, loan growth ratio and loan structure.Firstly, we find that capital regulation have important effect on the behavi -or of banks'loan size. Banks will adjust loan size according to their capital status after 2004. If Capital-adequacy banks hold more risky asset, their loan ratio will rise, however, if the under-capital banks hold more low-risk assets, the loan ratio decrease. However, this effec does not exist before 2004.Secondly, by using 175 commercial banks' unbalance panel data, we find that capital regulation limits the pace of credit expansion of banks. After the implementation of capital regulation, banks adjust credit expansion based on their capital levels, which supportting the "monitoring costs" hypothesis. We categorize sample according to bank's capital, find that the capital-constraint bank significantly decreases the loan growth rate during capital buffer period, however, under- capital bank decreases the loan growth rate after 2007. Furthermore, sub-sample test results support "soft capital" and "hard capital" hypothesis.Finally, this article studies the effect of capital regulation on the behavior of banks' loan allocation in China. By Using 143 commercial banks' unbalance panel data, we find out that capital regulation have important effect on the behavior of banks' loan allocation. Banks will adjust loan structure according to their capital status after 2004. Capital-adequacy banks hold more highly-capital consumption loan, the credit loan ratio rise, however, the under-capital banks hold more low-capital consumption loan, and the private loan ratio will rise. We also find the difference of bank's loan allocation behavior by bank size.Chapter 7 studies the effect of capital constraint on commercial banks' intermediary business revenue. Using 149 commercial banks' unbalance panel data, we find that the minimum capital requirement has not provided positive incentives for the development of intermediary business. the under- capital banks did not attempt to increase the non-interest income to adjust their business structu -re. In contrast, we find that the bank's capital is positive correlated with interme -diary business income. The higher level of bank capital, the higher ratio of intermediate business income. In addition, sub-sample test results show that the capital regulatory pressure has effect on intermediary business revenue just for state-owned and joint-stock commercial banks, we did not find the effct in city and rural commercial banks.Chapter 8 studies the effect of geographic diversification on the city commercial banks' lending behavior,risk level and bank performance.Using 104 city commercial banks' unbalance panel data, we find out that the geographic diversification banks have higher size, higher capital ratio and large market share.Compared to the local banks, geographic diversification banks have lower risk level. Furthermore we test the relation between the geographic diversification level and banks' lending behavior,risk level and bank performance. We found that the higher level of geographic diversification is associated with higher loan growth ratio and lower impaired loan ratio in banks.Innovation of this paper can be concluded as follows:Firstly, we study the effect of capital regulation on the banks' behavior using a large sample data, Due to the constraints of data, previous domestic research has focused on the study for state-owned and joint-stock commercial banks, which neglected city commercial banks and rural commercial banks. On the one hand, empirical research will be flawed because of the sampel selection problem, and estimation results may be biased and less convincing. On the other hand, there are many differences between these two kinds of commercial banks, such as bank size, business scope, policy support and financing constraints. Therefore, this paper seeks to put more city commer -cial banks, rural commercial banks into the study in order to put forward a more comprehensive and credible results.Secondly, under the support of large sample, this paper compares the behavior of different types of banks constrained by capital regulation. We explained the factors that cause these differences, and provided empirical evidence for regulatory authorities'differential monitor policy.Finally, this paper expands the scope of existing research, enrich the existing research results. Previous research has only focused on credit expansion because of data limitations.This paper expands the scope of the study and analyses the capital constraint effect from the perspectives of loan size, loan growth ratio and loan structure. In addition, the paper examines the capital constraints effect, which may shed some light on a few heavily discussed topics, such as transformation of commercial banking, cross-regional development and so on.