Competition In The Market And Bank Capital Adequacy Level

Economic theory and empirical evidence has not yet agreed on the effects of increased competition on bank capital ratio. The dispute may result from the disadvantage of the traditional method to measure the degree of competition--market concentration.This paper takes use of a new method to directly measure the degree of competition, which is deduced from the equilibrium condition of banks’profit maximization. Then using panel data for14listed Chinese banks between2007and2011, this paper aims to test whether increased competition makes banks hold higher capital ratio. Employing autoregressive distributed lagged (ADL) method, this paper shows that banks tend to hold higher capital ratio when the market competition becomes more severe. And this result holds when I take into consideration control variables such as the degree of concentration, macroeconomic variables, wider financial and institutional environment, and other variables.The research provides empirical evidence from China for the theoretical perspective that competition enhances banks’steadiness. And the policy advice is that we should create sufficiently competitive market environment to enhance the steadiness of the banking system.