Regulatory Environment, Corporate Governance And Risk Taking Of COMM-Ercial Banks

The risk of financial industry is ever increasing with the economic globalization, which has attracted much attention to the research on risk control of banking system. One direction of the studies is conducted from the perspective of banking governance, aiming to explore the factors which affect the commercial banks’risk level and banks’risk-taking patterns. A novel perspective is quite beneficiary to both theories and practice of the banking governance revolution in our country. With a thorough work over thirty years, the financial system in our country has made considerable progress in general; however, the progress is accompanied by a series of severe problems which call for further efforts. Though many domestic scholars have made some suggestions and proposals for the path of banking governance revolution, most researches on banking governance mechanism are conducted from the perspective of general corporate governance theory, due to the lack of a standard theoretical framework addressing the particularity of banking governance, which has led to a discrepancy between the research results and the current domestic situation. Comparatively speaking, foreign scholars have conducted a more successful and pertinent research on banking governance theory. Nevertheless, it is impractical to import foreign theories with little localization, due to the difference between domestic commercial banks and western countries’banks, such as implicit deposit insurance.Out of the concerns stated above, this paper incorporates the uniqueness of domestic banking environment and other factors such as external regulation, investor legal protection and corporate governance into the theoretical model of Jeitschko&Jeung(2005), thus creating a general multi-factor theoretical framework to explore the effect of regulation environment and bank governance on commercial banks’ risk-taking behavior. This paper groups the related agents of banks into shareholders, managers and external regulators, and then analyzes the optimal behavior of shareholders and managers when constrained by external regulations. We find that the ultimate risk-taking behavior of a bank is the interaction result of all parties.The conclusions are stated as follows. First, provided that there is implicit deposit insurance, shareholders are inclined to be over adventurous in determining the bank’s risk level whether capital regulation is exerted or not. Relatively, financial leverage restriction can reduce shareholders’risk preference to a certain extent. Second, the managers’risk level choice depends on the intensity of investor legal protection. There is a critical value of the investor legal protection degree. It can be regarded effective protection when the legal protection degree reaches above the critical value; and in this situation managers choose the lowest risk level. Otherwise the investor legal protection does not effectively reduce the managers’risk preference. The ultimate risk-taking policy of a commercial bank is determined by both external regulation environment and internal governance characteristics.Based on this theory, this paper collects6years’ data of14public banks and12non-public banks, and then conducts tests on relevant propositions. The empirical results mostly support conclusions of the theoretical model.