Study On Capital Adequacy Regulation And Risk-taking Behavior Of Commercial Banks

Basel Accord is the international convergence standard for capital adequacy regulation. But there have being so many disputes concerning whether capital adequacy regulation could decrease banking risk effectively from the birth of Basel Accord, both in theoretical leteratures and supervisory practices. In recent years, the issues of the capital adequacy regulation have become the concerns of more and more academics in China. Due to lately beginning, most literatures in China deal with introducing the capital regulation framework of Basel Accord and interpreting the capital position of commercial banks. There is few studies paying attention to the impact of the capital requirement on the risk-taking behavior of banks. For China is changing into market-oreinted economy, the backgrounds and limits of our economic and political institutions are greatly different from those of the west developed contries, therefore it is particulare to implement the capital adequacy regulation in china. Consequently, some important issues need investigating both theoretically and empirically, such as the impact of capital adequacy regulation on banks'risk-taking behavior, the adjustments of commercial banks'capital and risk asset position under capital constraints, the relationships between capital, risk and efficiency in banking. The necessary researches can contribute to improve capital adequacy regulation in China and enrich the financial regulation theories.Fosusing on the risk-taking behavior of banks under the capital adequacy requirement and employing the qualitative and quantitive approaches, this dissertaion probes into the impacts of capital regulation on banks'behavior. With the proposition that banks operate continuously and maximizing their chart value, the inner mechanism is analysed that how the capital adequacy requirement influences the capitalization and risk-taking of banks. The capitalization and risk-taking behaviors befor implementing Regulation Governing Capital Adequacy of Commercial Banks in 1991-2003 and the effects of the capital requirement in 2004-2006 are empirically investigated with simultaneous equatins model. Base on the groundwork that capital, risk and efficiency mutually influences each other, the relationships between capital, risk and efficiency of Chinese banks are discussed to provide empirical evidences to consummate the capital regulation institution in China.After surveying the foreign and dometic literatures, the thoeritical rationalities for implementing capital adequacy regulation are summerised in this dissertation, such as market failure in banking, fragility of pacnic withdrawals faced by banks, weakened market constraints lead by safety net, for instance, deposit insurance. And information asymmetry, advese incentives of deposit insurance, agence problem of managers, and competition encourage banks to take more risk. Base on the characteristic of durative operatons, the mathematical framwork is set up to model the bank's behaviors under capital adequacy requirement, with presuppositing that the bank are maxmising its net income and charter value. In this case, the net income decreases while the capital increases, so the bank would reduce the capital and the minimum capital requirement could force the capital constrainted bank to increase its capital ratio. The model shows that the optimal ratio of risk asset is the decreasing function of capital ratio under capital adequacy requirement; therefore the supervisory authority could change the risk preferences and risk-taking behaviors of banks by increasing minimum capital adequacy requirement.The transitional economy charateristic, the market-oreinted reform, is introduced into the empirical framwork as the institutional setting factor, for the existing literaures suggest that whether the regulation policies are effective depends on the differences of economic institutional background and supervisory practices among the nations and . The capitalization and risk-taking behaviors in our economy are investigated in the dissertaion, with the marketization index depicting the transitional changing course. And the effects of Basel Accord are also discussed. The postitive associations between capital and risk adjustments are found in the period before implementing Regulation Governing Capital Adequacy of Commercial Banks, 1991-2003. And the results show that the risk-taking behaviors of banks are evident in the period for the market-oreinted reform makes the banking competion more intensive and introducing Basel Accord has no significant impacts on banks increasing their capital for the capital requirements are carried out uncritically. The empirical evidences after Regulation Governing Capital Adequacy of Commercial Banks are put into effect show that the negative relationship exists between capital and risk behaviors of banks, which support the theoretical results of the mathematical model.The relationships of capital, risk and efficiency are analyzed for the sample of Chinese banking between 1991-2006. At first, the efficiencies of Chinese banking are estimated based the nonparametric frontier approach RAM, range adjusted measure. Then the efficiencies are enclosed in the analysis framwork. And the impacts of the ownership and market-oreinted reform on their relationships are also investigated in the framwork. Evidences suggest that efficienct banks appear to take more risks, which means that efficient banks would increase the the earning asset to total asset ratio inorder to increase their incomes, due to theit attention to their performance and the pressure from the competitions. But the results show no evidence for the relationship between capital and efficiency in our sample, possibly indicating that banks haven't attach importance to capital adequacy requirement, for there is no micro foundamental for the market constrainting mechanism.