Effective Way To Improve The Governance Structure Of State-owned Banks: To Adjust The Capital Structure

China has been in a long term undergoing a quasi-administrative bank governance model under which there is no check and balance of power and no incentives and constraints mechanism; and its efficiency is relatively low. As China has successfully entered WTO and the timetable to open up the financial industry is impendent, it is imperative to enforce the corporate governance of commercial banks and to increase its efficiency. This paper is with a view to the unique features of banking organizations and further explores the basic clue of a better way to improve the corporate governance structure of state-owned banks from the angle of how to perfect the capital structure. The author uses his basic analysis approaches of the enterprise structure and capital structure theories to study the unique impact mechanism of the bank capital structure on bank governance structure, in connection to China's financial system in a transitional economic environment. In the first place, the author studies the capital structure and its determination mechanism. In their 1958 paper "The Cost of Capital, Corporation Finance and the Theory of Investment", Franco Modigliani and Merton Miller brought up the theorem of irrelevance of capital structure, that is under the strictest assumption such as a complete competition capital market the selection of the capital structure in an enterprise is irrelevant to the enterprise value. M.Jenson and W.Meckling noticed the separation of ownership and control and they drew a conclusion that the optimum capital structure in an enterprise is a structure which makes the agency cost down to a minimum where the marginal agency costs of equities equals to that of bonds. Under an information asymmetry assumption, S.Ross studied the necessity of liability financing. He discovered that the liability ratio may reflect inside people's confidence in their enterprise which may deliver information about the enterprise performance to outside people. With the incomplete contract assumption, P.Aghion and P.Bolton studied the discretionary transmission mechanism under which the optimum liability ratio is a liability level that causes an enterprise to go bankrupt and brings about the optimum control transmission from shareholders to creditors. Although the modern capital structure theory has advanced significantly and its conclusions are also of generality, its applicability in financial institutions such as commercial banks is still a question worthy of an in-depth consideration. This thesis then investigates the unique features of the capital structure and the governance structure in banking industry. Commercial banks are financial intermediaries that transfer funds from lenders to borrowers through the payment system. In the economic system, they are engaged in assets term transformation, provide liquidity for depositors, produce necessary information, and supervise borrowers' behaviors, etc. In addition, they have important functions such as money creation, payment and clearing. In contrast to that of common companies, the unique features of banks lie in their assets and liabilities. Firstly, the bank capital has a high leverage capacity. Secondly, The bank liabilities have a hard constraint. That is to say, banks need not only just pay up, but also repay in advance probably. Meanwhile, the value of bank loan assets highly depends on the inside managers' private information and banks also bear certain systematic risks. Thirdly, the main creditors are dispersed small depositors who are likely to be free riders and have no timely information. They have their agents directly intervene banks' operation on behalf of themselves. These unique features certainly have impact on the behavior selections of shareholders, creditors and managers. As a result it further affects the market value of banks, This thesis investigates the current situation of the capital structure and governance structure of China's state-owned banks. It reaches a conclusion that the improvement of bank governance structure...