An Examination of Inflated Bank Capital and Credit Risks in China
36 Pages Posted: 2 Dec 2012
Date Written: December 2, 2012
Since the historical capital regulation by China Banking Regulatory Commission (CBRC) in 2004, Chinese banks have reported remarkable capital growth in their statements. This study examines the impacts of heavily issued and cross-held subordinate debt (SD) towards inflated capital adequacy ratios (CARs) and the credit risks of Chinese banks when they meet regulatory requirements between 2004 and 2009. Our findings suggest that mandatory capital regulations in China have significantly improved bank capital levels despite the widespread window-dressing practice. In addition, the well-capitalised Chinese banks have lowered their credit risks in our sample period. However, the undercapitalised banks may require more strict regulations.
Keywords: subordinate debts, bank capital, risks, regulation, China
JEL Classification: G21, G28
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