Capital Adequacy Requirement And Commercial Bank Risk Taking In China:Theoretical And Empirical Research

Commercial banks are based on and developed from capital which confines banks’scale and the ability to resist the risk. Since the Basel Accord was implemented, capital adequacy requirement has been an international unified standard of safety and stability of a single bank, even the whole banking system. Capital adequacy requirement is the core of prudential banking regulation. Considering the importance of capital adequacy requirement, whether it is necessary and can reduce risk taking of commercial banks are always debated in academic circle and supervision practice.China is in her transition period. There are great differences between China and Western in political and economic institution. In view of the particular market circumstance that Chinese banks face, implement of capital adequacy requirement has its particularity in some degree. Consequently, a lot of important issues need investigating both theoretically and empirically, such as whether market discipline faced by Chinese commercial banks can help banks improve capital adequacy, how banks adjust their capital and risk taking level in light of capital adequacy requirement, how capital adequacy requirement takes effect on banks risk control and operational performance and whether banking supervision can solve the incentive compatibility problem between maintaining banking system stability and improving banking corporate value. The aforementioned research can help enrich our banking supervision theory, provide empirical evidence to our regulation behavior and reform, explore the applicability of Western CAR standards in China and consummate our banking supervision institution.First of all, this dissertation confines the connotation of capital, risk, banking regulation and capital adequacy requirement. Financial unstability theory, public interest theory, representative hypothesis, free banking school and captive theory are compared. After analyzing the inherent reason of banks’pursuit of risk, the huge negative externality of bankruptcy and numerous small depositors who have no restriction on banks, the paper accepts the necessity of CAR regulation and emphasizes that effective regulation can both help control banks risks therefore carry out the maximum of social welfare and provie proper incentive to banks so as to improve corporate value.Second, the dissertation points out that capital adequacy requirement is much more necessary in China because of the insufficiency of depositor market discipline. The validity of depositor’s "Vote-by-Foot" mechanism to commercial banks’capital collocation restriction is systemically demonstrated through theoretical model and empirical analysis. If a single bank raises its CAR, it can gain relative capital adequacy advantage so as to obtain more deposit. At the same time, the average CAR level of whole banking industry is improved and all the banks share the benefit. Empirical study shows that Chinese depositors can’t differentiate and select a single bank just based on commercial banks’solvency, so that depositors can’t monitor banks effectively and restrict the excess risk taking behavior.Third, capital adequacy requirement influences banking risk taking behavior weakly in China. The relationship between regulation pressure and banks’adjustment of capital and risk is empirically verified basing on panel data of16commercial banks between2004and2010listed on Shanghai and Shenzhen stock exchange. The result shows that punishment pressure has no significant effect on banks’adjustment of capital and risk, warning pressure obviously improves the capital adjustment of banks which have insufficient capital cushion but it has no significant effect to risk adjustment either. Because of distinct saving and borrowing rate margin, commercial banks never abandon their pursuit of high risk asset portfolio even in view of capital adequacy requirement, representing rapid growing credit scale in recent years. Capital adequacy requirement forces banks raise capital in large volume through endogenous and exogenous ways such as IPOs, allotment, seasoned equity issues and subordinate debt offerings.Fourth, the dissertation holds that in China the incentive insufficiency in capital adequacy requirement may make bank managers pay less attention to the task of risk control. This paper constructs mathematics model to study the incentive contract problem when commercial banks face principal agent chain under multi-tasks circumstance. Because supervisory authority provides insufficient incentive on CAR and risk control task, the optimal contract can’t be implemented. In this case, banks will weaken the incentive on CAR and strengthen the incentive on performance if the cost functions are independent or substitute and the output of two tasks are positively correlated. As a result, banks managers will follow the policy and their efforts on CAR will be lower than the minimum CAR demand, so the social welfare declines.Fifth, the dissertation believes that although supervisory authority and banks have different risk preference, but they are not completely contradict. The article selects relevant data of304banks in50countries and analyzes the influence on bank’ risk taking and corporate value brought by principle supervisory measures through empirical models. The result shows that information disclosure is incentive compatible, capital adequacy requirement and safety net are in favor of reducing risk taking but go against corporate value, market entry is the opposite, and supervisory power and operation restriction are against to both.Finally, the dissertation makes a conclusion and provides some concrete work thinking and policy recommmendations after investigating the implementation of capital adequacy requirement in China and the deficiency of capital adequacy requirement in current financial crisis.