An Empirical Study On The Determinants Of Capital Adequacy Ratio Of Chinese Commercial Banks

China Banking Regulatory Commission (CBRC) began to require a minimum of8%capital adequacy ratio (CAR) on Chinese commercial banks in2004. Since then, commercial banks have greatly improved their capital condition. Furthermore, bank CARs have shown wide variations above the minimum level. Confronted with fierce competition, banks have attached great importance on voluntarily improving their CARs to protect against various kinds of potential risks.This thesis explores the determinants of changes in CARs of Chinese commercial banks. The chosen explanatory variables include return on asset (ROA), liability ratio, fixed asset guarantee, non-performing loan ratio (NPLR), interest rate, inflation rate, the proportion of state-owned holdings, and two dummy variables:whether listed and meet the8%requirement.First, Logit regression is carried out to study the determinants of a bank’s likelihood of reaching the required8%. Regression results reveal that the liability ratio and NPLR ratio are inversely related to while return on asset is positively related to the likelihood of reaching8%. Second, the fixed effect studies the linear relationship between the above explanatory variables and CARs. In this part, the regulation effect is first tested. Results from both the T-test and the ordinary least-square indicate that variations in CARs of the banks that already reached the8%level cannot be explained by the regulation dummy. That is, banks endogenously choose their capital structures once their CARs reach8%. Then, multivariate regression is applied. Regression results show that the liability ratio and asset guarantee are inversely related to while ROA and whether listed are positively related to changes in CARs. Based on the empirical and normative analyses, the thesis then proposes ways to improve CARs.