Micro-mechanism Analysis About The Validity Of The Capital Adequacy Regulation To Commercial Bank

According to theories of the capital structure, this thesis applies a mathematic model frame to explain the validity of the capital adequacy regulation on risk-seeking behavior, undertaking loan losses and company value of commercial banks. Then it analyses the cost and benefit of the capital regulation in China, and brings forward corresponding countermeasures and suggestions to reduce the regulation cost and strengthen the validity of the regulation instrument.Capital adequacy rule is one of the core instruments in bank regulation system with which financial regulatory administrations can request commercial banks to raise adequate capital for their risk assets, in order to provide a cushion for capital loss, reduce bankruptcy probability and guarantee the security of our financial system. In 1970's, financial regulatory administrations had begun to see capital adequacy requirements as one of regulation rules to control moral risks derived from the deposit insurance system. Basel Committee on Banking Supervision released "International Convergence of Capital Measurement and Capital Standards" and clearly brought forward 8% risk-based capital rule in 1988. Under the background of the new financial environment, measure modes and methods in the old Basle Accord are not suitable to the latest new circumstance. Therefore the Basle Accord experience supplement many times from 1988, the greatest change is the New Basle Capital Adequacy Accord. This Basel Accord will help financial regulatory administrations to improve their bank regulation system.From the micro-view of bank, capital adequacy regulation puts itself into effect by changing a bank's capital structure, namely to control excessive risk-taking behavior and undertake loan losses of bank. We use the model from theories of capital structure to prove that the tight capital adequacy requirements can lead banks to reduce their risklevel, and the tighter a capital regulation, the more effectiveness of risk control. Furthermore, it shows that capital regulation can strengthen banks' power of undertaking loan losses. Experimental tests also prove that capital adequacy requirements may lead banks to hold higher capital ratios than otherwise would. However, capital adequacy regulation can't realize the goal of maximizing banks' market value, especially for banks with an optimal market capital ratio lower than the minimum standard. In a word, capital adequacy regulation isn't a perfect instrument and measure of bank regulation.To our country, we need to analyze the efficiency of capital regulation. According to the cost-analysis, there are two main social cost derived from the capital adequacy regulation. On the hand, capital adequacy requirements will make banks to reduce their credit offers, as a result, give rise to a fall in productive investment and put a contractionary effect on macroeconomic development of China. On the other hand, our government will have to raise capital for state-owned commercial banks as a result of their lower capital ratios.To reduce the social cost and strengthen the validity of capital adequacy regulation in China, financial regulatory administration should take measures to perfect the capital rule in some aspects, such as capital adequacy criterion, weakening macroeconomic decline derived from capital regulation and enrich state-owned commercial banks' capital, etc.