The Effect Of Capital Ratio On System Risk

The onslaught of the international financial crisis in 2008 has highlighted the extreme vulnerability of the global financial regulation system.Before financial crisis,the regulatory authorities are entirely convinced of the self-regulatory ability of the market and furthermore they lack a deeper understanding of systemic risks.Meanwhile,the increasingly urgent appeals for the reinforcement of the macro-prudential supervision have drawn widespread attention from both academic circles and government departments.It is gradually becoming evident that supervision must go beyond micro-prudential policy framework,ensuring a better supervision mode against systemic risks from the macro level.This paper examines the relationship between banking system risk and bank capital adequacy ratio in three countries.The systemic risk of the bank sector is measured by ACoVaR computed by the quantile regression method.The American and Japanese bank capital adequacy is represented by Tier 1 ratio.The capital adequacy of Chinese bank is represented by the ratio between total equity and risk-weighed assets.With other variables such as size,asset quality and bank management level,the effect of capital ratio on ACoVaR in America,Japan and China are discussed and compared.It has been established that bank capital ratio has a significantly negative effect on ACoVaR in those countries.The positive effect of NPL ratio on system risks is also robust,which means NPL ratio could be an another useful regulation tool as capital ratio.By comparing the empirical results of the three countries,it can be seen that China has a higher level of system risk and capital ratio has a greater effect in maintaining the stability of the U.S.and Japanese banking system.The difference in economy institution and finance development could affect the function of bank capital regulation.Therefore,not only it is necessary for China to fortify the capital control on the bank especially from the perspective of macro-prudential supervision,but also should speed up the process of finance revolution in the future.