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Capital regulatory pressure, charter value and bank risk-taking: empirical evidence for China

Author

Listed:
  • Jinyi Zhang
  • Hai Jiang

Abstract

Purpose - The purpose of this paper is to identify the effect of induced capital regulatory pressure on banks’ charter value and risk-taking, and the influence of bank’s charter value on its risk-taking under such a capital regulatory pressure. Design/methodology/approach - The authors use two different estimations to check the robustness of the results. First, they apply a two-stage least squares mode to estimate the impact of capital requirements and bank charter value on bank risk-taking, with the influence of capital regulatory and market-force variables on bank charter value. Second, to reduce the problem of unobserved heterogeneity, the authors use dynamic panel data techniques as a check for robustness. Findings - The empirical results show that higher capital requirements pressure brings about a lower charter value for banks, which in turn increases their risk-taking. The issue of banks’ risk-taking is also affected by their size: large banks seem to be more stable than their smaller counterparts. Research limitations/implications - The authors’ findings suggest that regulatory pressure has had the desired impact on insolvency risk for Chinese banks due to the expected penalty triggered by a breach of capital requirements. Practical implications - It is the first paper that investigates the impact of capital regulatory pressure on risk-taking of the Chinese banking system, which sheds light on concerns about regulatory monitoring of bank risk and capital regulatory framework. Social implications - This paper measures the impact of capital regulation on Chinese bank charter value and risk-taking and offers some support for the implementation of Basel III in China. Originality/value - The authors have constructed different measures of regulatory pressure to investigate the influence of new capital regulatory regime on banks’ behavior. Most importantly, the exogenous changes of banks’ capital ratio induced by capital regulatory pressure during the past decade that provides a unique opportunity to directly analyze the impact of capital regulatory pressure on bank charter value and risk-taking.

Suggested Citation

  • Jinyi Zhang & Hai Jiang, 2018. "Capital regulatory pressure, charter value and bank risk-taking: empirical evidence for China," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 26(1), pages 170-186, February.
  • Handle: RePEc:eme:jfrcpp:jfrc-01-2017-0002
    DOI: 10.1108/JFRC-01-2017-0002
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    Citations

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    Cited by:

    1. Syed Moudud-Ul-Huq & Rabaka Akter & Tanmay Biswas, 2020. "Impact of Financial Crisis on Credit Risk: Pre- and Post-financial Crises 
in an Emerging Economy," FIIB Business Review, , vol. 9(2), pages 118-132, June.
    2. Le, Huong Nguyen Quynh & Nguyen, Thai Vu Hong & Schinckus, Christophe, 2022. "The role of strategic interactions in risk-taking behavior: A study from asset growth perspective," International Review of Financial Analysis, Elsevier, vol. 82(C).

    More about this item

    Keywords

    Risk-taking; Chinese banking; Capital regulatory pressure; Charter value; G21; G28; G32;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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