Relationships Between Capital Buffer, Risk And Performance

The global financial crisis in 2008, not only cause serious damage to the financial system, also make the global economic downturn. In the post crisis era, people have been rethinking the causes of the crisis, and have raised some questions about the validity of financial regulation. Regulatory authorities have therefore formulated a more stringent regulatory policy the Basel Accord ?. The new accord continues to strengthen the bank's capital regulation, and emphasizes the application of buffer capital, which is the difference between capital adequacy ratio and the minimum capital requirement, reflecting the level of bank capital.The impact on China's banking industry is relatively small in this crisis, with the acceleration of the financial globalization, the impact of the international financial system will be gradually increased. Therefore, it is necessary to study the validity of China's banking regulatory policies in execution, especially sorting out the relationship between buffer capital, risk and performance, to make sure that capital regulation is helpful to reduce the banking risk and improve performance.In this paper, we take Chinese 60 banks as the research sample, which every bank asset exceed one hundred billion and sample total asset scale accounted to 76%. Using the sample panel data over the period 2007 to 2014, we construct a simultaneous equations model and exploit a series of variables to study the relationship between capital buffer, risk and performance, GMM estimation method is also be used to estimate the model. Besides, we also study the two samples of Chinese listed banks and systemically important banks. The main conclusions of this paper are as follows. First, we find the relationship between buffer capital and risk differ from risk measurement variable, there is a negative relationship between capital buffer and Z-score and positive between capital buffer and HHI, also non-performing loan ratio. Second, capital buffer and performance significantly negative. Third, the relationship between buffer capital, risk and performance is negative of systemically important banks, indicating that there is a certain degree of regulatory policy failure. Finally, according to the main research conclusion, two policy suggestions are raised as follows. Firstly, both risk prevention and performance improvement should be considering by capital regulation policy makers, effectively improve the bankers inherent motivation to hold adequate capital, and eventually, guide the bank changed from passive management to active management. Second place, a reasonable independent regulatory system could be designed for systemically important banks, ensuring financial system stability and sound development.