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The Effectiveness of Capital Regulation on Bank Behavior in C hina
Author(s) -
Fu Yishu,
Lee ShihCheng,
Xu Lei,
Zurbruegg Ralf
Publication year - 2015
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12045
Subject(s) - shareholder , corporate governance , business , moral hazard , financial system , government (linguistics) , capital requirement , bank regulation , capital (architecture) , agency (philosophy) , finance , monetary economics , accounting , economics , market economy , linguistics , philosophy , archaeology , epistemology , history , incentive
Abstract This paper examines the impact that ownership and governance structures have on how C hinese 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 C hina to mitigate the prevailing moral hazard and dual‐agency problems that arise from the government being both the regulator and the majority shareholder.