The Relationship Among Risk, Efficiency And Capital In Commercial Banking

While the national financial crisis broke out in many countries, global economycaused a serious injury. The supervisors of banks and financial scholars pay moreattention to the stability of banks and financial institutions. Banks are the most importantfinancial institutions, which could impact the healthy development of economy.Bankcapital, risk and efficiency are three significant factors in the bank system.therefore,it isvery important to study the relationship among them.We build a simultaneous equations model, and estimated the relationship among risk,efficiency and capital in commercial banking. This study drew three conclusions: First,there is a positive correlation between capital and risk in commercial banks, which is dueto the high capital requirements cause the reduction in the level of expected futureearnings. Commercial banks will increase investment in high-risk projects to compensateexpected loss of income; The second, the negative correlation between the banks and thecapital efficiency, indicating that the high capital ratios tend to have a negative effects onoperating results; Third, there is a negative correlation between risk and efficiency,because they do not fully explain invalid credit supervision and control of operating costs.Lower efficiency level of banks will face greater costs, the banks will increase the risk tocompensate for these losses.Based on the analysis,this paper argues that we need to pay attention to thefollowing points:First, we should find the equilibrium point among efficiency, capital and risk. One ofthe three factors changes will cause the other two change. The bank mangers need toconsider many aspects to find the balance the factors.Second, we should break themonopoly of China’s commercial banks and improve the competiveness of them. Thefour state-owned banks always occupied a dominant position in China’s banking system.The China’s bank system is highly monopoly and the development of China’s bankingsystem is still need to be improved. Third, we should adjust the size of assets of thecommercial banks in China effectively. The larger banks can be more effective assetallocation to reduce their risk by, in order to enhance the efficiency and profitability ofbanks, thus increasing the scale of bank assets will help enhance the anti risk ability ofChina’s banking sector and profitability.