Capital And Risk Adjustment Under Capital Regulation

1988 Basel Accord is the international convergence standard for capital adequacy regulation, which firstly established the Capital Adequacy Ratio supervision as the core of the supervision institution on global banking industry. The New Basel Accord formed the effective capital adequacy framework based on three pillars in 2004, including:minimum capital requirements, the supervision and inspection of regulatory authorities, information disclosure, and it has been complied by global banking industry in common nowadays. However, because of the financial crisis in 2008, the regulatory authorities began to reflect the defects of the regulatory framework. Due to this, the Basel Accord III, which released in 2010, made more stringent regulatory requirements on the control of systemic risk in order to maintain the financial system's stability.In recent years, China has been trying to build our country's regulatory system actively on the basis of Basel II. As of June 2011,311 banks'capital adequacy ratios have met the regulatory requirements. But the financial crises tells us that higher capital adequacy ratio is not equivalent to the financial security; and the Basel AccordⅢ's adjustment of regulatory framework also shows that it is a long way to go on completing capital regulatory regime. Recently, the CBRC issued "commercial bank's capital management approach (draft)", which indicates a comprehensive range of specifications on China's banking regulatory issues.Till now, the strategic significance of regulatory capital becomes more prominent. The issues on how capital regulation adjusting the bank's capital and risk, as well as the effectiveness of capital regulation reducing the risk becomes the focus of attention.This paper aims to study how China's commercial banks'capital and risk adjusted under regulatory pressure, especially digging out how the regulatory pressure plays since the high capital adequacy ratio. At the same time, I hope the results of 2005-2010 research can provide empirical support to the effect of the new approach's increasing of capital adequacy ratio. Thus, this paper can improve the China's regulatory system possessing important theoretical and practical significance.Firstly, this paper described capital regulatory regime from both theoretical and practical aspects, followed by analysis of the commercial banks'implementation process, current situation and problems in China. In the empirical part, I use a simultaneous equations model to analyze the adjustments in capital and risk with 17 commercial banks annual panel data from 2005 to 2010. The empirical study based on two aspects:different nature of capital measure and different types of commercial banks. The results show that:the size of bank assets, the size of off-balance assets and ROA have a significant impact on capital adjustments; capital adjustment and the size of off-balance assets significantly affect the bank's risk-adjusted. Both capital and risk-adjusted have stability endogenous trend. Capital regulation has significant impact on capital adjustments, but the banks with regulatory pressure don't make capital adjustments to increase their capital adequacy ratio; capital regulation does not affect the bank's risk-adjusted at all. Finally, according to the empirical findings, we promote capital regulatory policy proposals in three areas:on the regulatory level, the bank level, as well as regulatory framework.