Capital Regulation, Governance Mechanism,and Risk Taking Of Commercial Banks

The2007-2008financial crises not only tremendously exposed the fragility of banking system and the great harm of financial crises, but also made the study on the relation between corporategovernance and risk taking of financial institution a heated topic. How to reduce market risk and stabilize financial system through proper supervision and governance mechanism has become of great importance for economic regulators and researchers of all nations. Therefore, it has great practical significance to study the influence of commercial banking regulatory and corporate governance mechanism on the risk-taking problem of banks.Risk factors of banking system can be categorized into internal and external factors. Internal factors include operation state of the bank and the corporate governance factors; external factors are regulatory constraints and market discipline. Because of the late start of the banking system revolution, both the external regulation and the internal governance in our country are immature compared to those of developed countries. Hence, after taking into consideration of the status quo of our banking system, this paper aims to study the factors and mechanisms that have influence on the risk-taking behavior of our commercial banks through exploring the capital supervision and internal corporate governance mechanism.This article firstly summarized existing researches on risk-taking behaviors of commercial banks in the aspect of capital supervision and governance mechanism to get a general idea of previous findings and current problems. Then, this paper proposes a model that describes the affecting factors of commercial banks’ risk-taking behaviors. Lastly, using the panel data of159commercial banks from2001to2011, a simultaneous equation model of credit risks and a fixed effect model of total risks, this paper performs practical study on relation of the capital adequacy regulation, corporate governance mechanism and the risk-taking behaviors of our commercial banks. Both Three-Stage Least Squares and traditional fixed effect model are employed.The results of our study show that, of all the affecting factors, internal corporate governance mechanism and external capital constraints are of great significance, especially internal governance. To be more precise, capital supervision can effectively restrain the risk taking of commercial banks. In corporate governance mechanism, the results firstly prove the moral hazard hypothesis. Moreover, in the governance of director board, the complicated board structure and non-complete independent directors do not supervise and governance the management of banks. In addition, after group testing the results of the model, it is clear that joint-stock banks pay more attention to self-governance, the positive effect of corporate governance mechanism is more significant, and the reforms are more completed.According to our test, the following advises can be given regarding the commercial banks’ risk-control problem and the improvement of bank governance mechanism:classify regulation to banks of different types, improve the governancestructure of banking system, and build standardized supervisory system, such as stockholders’ meeting and board of directors.