Impacts of capital regulation and market discipline on capital ratio selection: evidence from China

Abstract

Purpose

The purpose of this paper is to examine the impacts of capital regulation and market discipline when China imposed most of the Basel I requirements between 2004 and 2010.

Design/methodology/approach

Following Barrios and Blanco (2003) and Rime (2001), the authors apply disequilibrium and simultaneous measurements to identify the financial safety net underlying capital movements as well as the changes in credit risk levels in China’s banking sector.

Findings

The authors discover that capital regulation outweighs market discipline by an average probability of 0.65-0.35 in the contribution to bank capital movements when banks significantly improve their capital buffers. In addition, the banking sector lowered its risk levels in the sample period.

Research limitations/implications

The findings suggest that the largest bank-based economy has consolidated its financial system for future expansion.

Originality/value

China’s banking sector requires closer examination of capital and risks provided by its emerging significance in the financial world. Thus, this study contributes to current literature.

Citation

Xu, L., Lee, S.-C. and Fu, Y. (2015), "Impacts of capital regulation and market discipline on capital ratio selection: evidence from China", International Journal of Managerial Finance, Vol. 11 No. 3, pp. 270-284. https://doi.org/10.1108/IJMF-02-2014-0021