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The Effectiveness of Capital Regulation on Bank Behavior in China

Author

Listed:
  • Yishu Fu
  • Shih-Cheng Lee
  • Lei Xu
  • Ralf Zurbruegg
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.

Suggested Citation

  • Yishu Fu & Shih-Cheng Lee & Lei Xu & Ralf Zurbruegg, 2015. "The Effectiveness of Capital Regulation on Bank Behavior in China," International Review of Finance, International Review of Finance Ltd., vol. 15(3), pages 321-345, September.
    • Handle: RePEc:bla:irvfin:v:15:y:2015:i:3:p:321-345
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    File URL: http://hdl.handle.net/10.1111/irfi.12045
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    References listed on IDEAS

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    9. Zhang, Dayong & Cai, Jing & Dickinson, David G. & Kutan, Ali M., 2016. "Non-performing loans, moral hazard and regulation of the Chinese commercial banking system," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 48-60.
    10. Millicent Chang & Andrew B. Jackson & Marvin Wee, 2018. "A review of research on regulation changes in the Asia‐Pacific region," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 635-667, September.
    11. Pan, Ailing & Xu, Lei & Li, Bin & Ling, Runze, 2020. "The impact of supply chain finance on firm cash holdings: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
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