How Do Capital Regulation In Bank Supervision Affect American Banks And Inspire Chinese Bank Supervision?

Capital ratio, defined as bank's own capital over its total risk assets, is one of the important indicators in bank supervision. It is brought forward in the Basel Accord and used by the G-10 countries since 1980s. On Mar. 1^st, 2004, China Bank Regulation Committee (CBRC) introduce this concept and require Chinese commercial banks to hold at least 8% of capital ratio. When the new Basel Accord is proposed in 2006, Chinese commercial banks are asked to raise the minimum capital ratio to 12%. Under this circumstance, that how capital requirement affects banks' strategies on capital holding, equity issuing and loan selling falls into our consideration. We try to use U.S. banks' data to solve these problems, in which capital ratio has been used for more than 17 years, and expect to find shortcuts for Chinese banks' supervision.This paper examines how bank supervision in capital ratio affects banks' strategies through the 1996:I-2006:IV U.S. data. By taking into account bank specific financial conditions, market conditions, macro conditions and regulatory conditions, we set up multivariable model, partial adjusted model and probit model to make analyses. This is the first paper that includes almost all-sided variables in capital ratio by driving the difference between compulsory increasing and automatic changes. And the introduction of probit models makes the outcomes comparable and convincible.Regression results show that banks that are under a formal action are found to have relatively lower capital ratios and improve their capital ratios significantly at the termination date of the formal action. To fulfill the requirements in supervision, they adjust their capital ratios by both increasing the numerator and decreasing the denominator. Estimation results show that undercapitalized banks are more likely to issue equity and sell loans, though such activities occur infrequently. Furthermore, in the loan selling activities, undercapitalized banks are found to earn profits, indicating that, in order to increase their capital ratios, banks that are under financial troubles choose to sell their good loan portfolios. In the end of this paper, we compare the bank supervision models of China with U.S. in details, and then address practicable advice to CBRC, including the cooperation among regulatory institutions, compulsory supervision, regional regulation and supervisory cost reduction. As for banks' strategies on capital requirements gradually adopted by Chinese bank supervisor, we put our empirical outcomes into practice by suggesting banks use both internal and external financing, adjust asset structure and pursue off-balance activities.