Research On Regulatory Arbitrage Of Commercial Banks In China Based On Capital Regulation

Throughout the history of global financial development,banks have avoided financial regulation in pursuit of high profits,and their regulatory arbitrage has caused multiple financial crises,the most recent global financial crisis occurred in 2008.The Basel Committee has issued a series of "Basel Accord",whether it is "Basel Ⅰ" in 1988,"Basel Ⅱ" in 2004,"Basel Ⅲ" in 2010,and "Basel Ⅲ: Finalising Post-Crisis Reforms" in 2017,these agreements have always implemented the risk supervision concept centered on capital supervision,aiming to effectively supervise banks.Although each revision of the "Basel Accord" will solve some existing regulatory arbitrage problems,at the same time,new regulatory arbitrage problems will emerge.Banks and regulators always play games around the model of "crisis-supervision-regulatory arbitrage-new crisis-regulatory upgrading-regulatory arbitrage",this game process demonstrates the intricate relationship between capital regulation and regulatory arbitrage of banks.Although China was less affected by the financial crisis,the entire international environment was strengthening capital regulation at that time.In order to cope with changes in the international situation,China Banking Regulatory Commission also successively issued the "Capital Management Measures for Commercial Banks(Trial)" and "Leverage Management Measures for Commercial Banks(Revised)" and other policies since 2012,marking that China’s new capital regulatory framework has been initially completed.At the same time,after the implementation of China’s "Four Trillion" economic stimulus plan,facing the strong capital demand of the real economy,the seeds of bank regulatory arbitrage gradually sprouted,banks began to use "Channel" business for regulatory arbitrage to pursue high profits,through large-scale development in recent years,the negative externality is the continuous accumulation of crossfinancial risks,and China’s systemic risks may erupt at any time.In 2017,the central government raised financial security to a new level of governance,and issued many financial regulatory policies,so that the regulatory arbitrage of China’s commercial banks has converged.From the perspective of the game process between China’s regulators and commercial banks,on the one hand,the regulators have become more stringent in their capital regulation of commercial banks,and on the other hand,the regulatory arbitrage of banks has sometimes been wanton and sometimes convergent.In order to further improve the capital supervision rules of commercial banks in China,the China Banking and Insurance Regulatory Commission and the People’s Bank of China issued the "Capital Management Measures for Commercial Banks(Draft for Soliciting Opinions)" in February 2023.In May 2023,the National Administration of Financial Regulation was officially established,aiming to reduce the regulatory arbitrage space of China’s commercial banks and strive to achieve full coverage of financial supervision.Therefore,exploring of the relationship between capital regulation and regulatory arbitrage of commercial banks is the focus of this paper,which helps improve China’s capital regulation,reduce regulatory arbitrage of commercial banks,maintain the effectiveness of capital regulation,and ultimately prevent the occurrence of systemic risk.On the basis of combing the relevant literature of capital regulation and regulatory arbitrage of banks,this paper explores the relationship of capital regulation and regulatory arbitrage of commercial banks,and examines the impact of capital regulatory pressure,capital regulatory loopholes on regulatory arbitrage of commercial banks and the impact of commercial banks’ regulatory arbitrage on the effectiveness of capital regulation;on this basis,it analyzes the current situation of regulatory arbitrage of commercial banks in China under different capital supervision conditions,reveals the performance and harm of regulatory arbitrage of commercial banks in China,and selects the relevant data of 89 commercial banks in China to establish a dynamic panel model for empirical analysis;at the same time,the practice and enlightenment of regulatory arbitrage of banks in the United States,Britain and Germany under the constraint of capital regulation are investigated;finally,according to the enlightenment of foreign banks and the problems existing in China’s commercial banks,this paper provides policy suggestions for improving China’s capital regulation and reducing regulatory arbitrage of commercial banks.The main conclusions of this article have four points: Firstly,by analyzing the motivation,implementation conditions,and consequences of regulatory arbitrage in commercial banks,it is found that profit-seeking is always the nature of commercial banks,but if there are no loopholes in financial regulation,commercial banks will also find it difficult to achieve regulatory arbitrage;once there are loopholes in financial regulation,commercial banks will engage in crazy regulatory arbitrage driven by profitseeking motivation;however,as a system,financial regulation cannot change day by day,and the reform of financial system always lags behind the regulatory arbitrage of commercial banks,so the long-term nature of commercial banks’ regulation arbitrage will inevitably cause more serious damage to the financial system.Secondly,by analyzing the relationship between capital regulation and regulatory arbitrage of commercial banks,it is found that capital regulatory pressure affects regulatory arbitrage of commercial banks,capital regulatory loopholes provide space for regulatory arbitrage of commercial banks,and regulatory arbitrage of commercial banks weakens the effectiveness of capital regulation.Thirdly,through empirical analysis,it is found that regulatory pressure on capital adequacy ratio and leverage ratio have different impacts on the scale of bank’ channel business,and the scale of bank’ channel business has weakened the effectiveness index of capital regulation;through heterogeneous effects analysis,it was found that state-owned large banks,joint-stock banks,urban commercial banks,and rural commercial banks have different sensitivities to capital regulatory pressures;through the analysis of regulatory effect,it is found that the matching of capital adequacy ratio and leverage ratio should be adapted,and too much difference will create regulatory arbitrage space for commercial banks.Fourthly,based on the inspiration from foreign banks and the problems existing in China’s commercial banks,in order to prevent China’s commercial banks from using capital regulatory loopholes,weak regulatory concepts,and financial regulatory gaps for regulatory arbitrage,policy recommendations are proposed to further optimize the capital regulatory system,transform financial regulatory management concepts,and improve the financial regulatory system.The innovation of this article lies in: Firstly,breaking through the single analytical perspective of regulatory arbitrage in commercial banks in the past,this study analyzes the motivation,implementation conditions,and consequences of regulatory arbitrage in commercial banks.At the same time,the relationship between capital regulation and regulatory arbitrage of commercial banks was studied within this analytical framework,analyzing the impact of capital regulatory pressure on commercial banks’ regulatory arbitrage,the impact of capital regulatory loopholes on commercial banks’ regulatory arbitrage,and the impact of commercial banks’ regulatory arbitrage on the effectiveness of capital regulation.Secondly,a factual description was conducted on the regulatory arbitrage of commercial banks in China under different capital regulatory conditions,and it was found that commercial banks in China use "channel" business for long-term regulatory arbitrage.Using 89 commercial banks in China from 2008 to 2021 as the research object,capital regulatory pressure indicators,bank channel business scale indicators,and capital regulatory effectiveness indicators were constructed,Empirical analysis of the impact of capital regulatory pressure on commercial banks’ regulatory arbitrage and the impact of commercial banks’ regulatory arbitrage on the effectiveness of capital regulation.Thirdly,by reviewing the development history of financial regulation,regulatory arbitrage of banks,and related financial reform measures in the United States,Britain and Germany,important insights are drawn on improving capital quality,establishing super regulatory agencies,and restoring central bank regulatory power.Based on the problems existing in China’s commercial banks,countermeasures are proposed to improve China’s capital regulation and reduce regulatory arbitrage in commercial banks.