Research On Regulatory Capital Arbitrage Of Commercial Banks

The U.S. subprime mortgage crisis and the innovation of structural financial products are closely interrelated, and the main motive of bank structured finance products creation is regulatory capital arbitrage, which is ignored by majority of scholars. The loopholes in the financial regulation system and insufficient means caused the financial crisis. In the process of Basel implementation, because of the defects in the agreement itself, it resulted in regulatory capital arbitrage and other issues. Regulatory capital arbitrage through asset securitization and other financial innovations reduce the measure of bank risk from regulatory bodies, but there is no substantial corresponding decrease in the total economic risk. Basel does not provide detailed enough or accurate risk division to different asset, and it may lead to bank regulatory capital arbitrage. Asset securitization can be used as a usual means for bank regulatory capital arbitrage. The different nature of the asset securitization can cause different degree of regulatory capital arbitrage. Asset securitization can create value for banks, but meanwhile it may undermine the effectiveness of capital adequacy requirements being a prudential policy tools. In order to guard against regulatory capital arbitrage, the most important thing is to make regulatory capital requirements can reflect the measure of risk, eliminate the root causes of regulatory capital arbitrage motivation, and ultimately achieve the unity of the regulatory capital and economic capital.Based on describing regulation capital arbitrage, this paper does an in-depth analysis of its behavior phenomenon in China’s banking industry and all kinds of effects caused by it. In the first part, paper raises the basic theory of capital adequacy regulation, various types of risk existing in commercial banks, and corresponding risks which need all kinds of capital to cope with. And the most important parts are regulatory capital and economic capital. The second part analyzes the two aspects of the commercial banks regulatory capital arbitrage, arbitrage patterns and asset securitization asset selection problem. And it also summarizes kinds of effects caused by regulatory capital arbitrage. In the final part, the paper does the analysis of China’s listed banks financial data from a qualitative point of view. The results show that China’s commercial banks may have arbitrage behavior, and regulatory capital arbitrage policy recommendations and opinions are provided.