Study On The Impact Of Capital Regulation On The Financial Performance Of Commercial Banks

Since2011, annual profits of commercial banks started to go over one trillion yuan, which makes them the most profitable industry in China. Thus, banking development has become the focus. At this stage, many Chinese state-owned commercial banks are gradually listed in the stock market; joint-stock banks are enjoying steady developments; city commercial banks have sprung up everywhere; and foreign banks are entering into the capital market on a large scale. In such a competitive capital market, pressures are put on to improve capital regulations, and to enhance the regulatory system. Following the introduction of Basel Ⅲ, China’s Commercial Banks’Capital Management Approach (Trial) was implemented on January1,2013. This new capital regulation has effectively controlled the capital risk of commercial banks, thus largely improving the quality of bank assets. This regulation limits the scale and the structure of capital, creating negative impacts on commercial banks through capital gains, capital quality, capital structure, and capital financial performance. In this paper, the author discusses the motivation of the capital regulation on commercial banks from a theoretical perspective. The author selected data from13domestic banks from2005to2011, and used panel data analysis to analyze the impact of capital regulation on financial performance of commercial banks. Results of the analysis reveal that the capital ratio is negatively correlated with bank earnings. When capital ratios increase, total banks earnings will have a negative impact. The increase of capital ratio takes up the asset share, which would have been used for profits, thus restricting the bank’s lending behavior, and ultimately affecting the income of commercial banks, and ability to gain profits. The increase in capital regulatory requirements enlarged the constraints on subordinated bonds, which adds pressures on batiks’ capital. Such capital regulation has effectively improved the quality of capital, and reduced capital risks, which together provide policy support for the long-term development for commercial banks. In conclusion, the author proposes policy suggestions by combining the implementation of Chinese capital regulation and the current operating conditions of commercial banks.