The Effectiveness of Capital Regulation on Bank Behavior in China

25 Pages Posted: 3 Sep 2015

See all articles by Yishu Fu

Yishu Fu

Southwestern University of Finance and Economics (SWUFE)

Shih‐Cheng Lee

Yuan Ze University

Lie Xu

University of South Australia - Centre for Applied Financial Studies

Ralf Zurbruegg

University of Adelaide; Financial Research Network (FIRN)

Date Written: September 2015

Abstract

This paper examines the impact that ownership and governance structures have on how Chinese banks react to regulatory pressure. We find that the current regulatory regime induces banks to increase their capital, but its effectiveness in doing so varies based on whether the bank is listed or not, and also who is the majority shareholder. We also find that the degree of central government ownership and the political ties the chief executive officer of the bank has play an important role in the risk‐taking behavior of banks. Overall, our results have a number of policy implications supporting the need to further reduce state ownership of banks in China to mitigate the prevailing moral hazard and dual‐agency problems that arise from the government being both the regulator and the majority shareholder.

Keywords: G21 G28

Suggested Citation

Fu, Yishu and Lee, Shih‐Cheng and Xu, Lie and Zurbruegg, Ralf, The Effectiveness of Capital Regulation on Bank Behavior in China (September 2015). International Review of Finance, Vol. 15, Issue 3, pp. 321-345, 2015, Available at SSRN: https://ssrn.com/abstract=2655211 or http://dx.doi.org/10.1111/irfi.12045

Yishu Fu (Contact Author)

Southwestern University of Finance and Economics (SWUFE)

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Shih‐Cheng Lee

Yuan Ze University

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

Lie Xu

University of South Australia - Centre for Applied Financial Studies

Way Lee Building, Level 3
GPO Box 2471
Adelaide, 5001
Australia

Ralf Zurbruegg

University of Adelaide ( email )

233 North Terrace
Department of Finance
Adelaide SA 5005
Australia
+61 8 8303 5535 (Phone)
+61 8 8303 4368 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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