The Impact Of Risk-Based Capital Regulation On Bank Risk-taking In China

Basel Accord and risk-based capital requirement is an international standard generally accepted on capital regulation. But there has been dispute on the impact of this rule, especially the impact on bank risk-taking, ever since its birth.In this paper, the primary purpose is to testify the effect of capital requirement on bank risk-taking on an empirical test. Before that, a review of literature on relative study in this field has been done. Through the review, we know more about the conflict over the researchers. Many factors can affect the relationship between capital requirement and risk-taking, such as charter value, managers’ incentives, recapitalization, etc. We also briefly introduced the history of capital requirement based on Basel Accord and the localization in China. All the work sheds light on our following study.To examine the impact of capital requirement on bank risk-taking, we gathered a sample containing totally75local banks covering a period of9years. Our estimation function is built on the partial adjustment model in which adjustment in this period is just part of the optimum adjustment to the optimum. Risk-based asset to total asset is chosen as a measure of risk. Following Jacques and Nigro, regulatory pressure is measure by RPG&RPL. Also other factors that may affect bank risk-taking are taking into consideration, such as bank size, ROA, etc.The result suggests that capital regulation may have different impact on banks with different capital level. For the banks under minimum requirement, regulatory pressure may incentive banks to take more risk, while for the banks above the risk-based capital minimum threshold tend to decrease the portfolio risk. And based on a comparison of banks before and after year2008, we find out that the bank size turn to be a significant factor to affect bank risk-taking and bigger banks may choose a lower risk level. This may be a result of the recent regulation reform after the financial crisis breaking out in2006. Market Discipline is an important pillar in the Basel regulatory framework, but our study suggest that pressure from market may not influence the risk-taking of the bank.Suggestions have been made based on our findings. To strengthen the effect of market discipline in China, more work on information disclosure need to be done. More attention on systematically important banks need to been drawn due to their special role in bank system.