AN EMPIRICAL STUDY OF THE EFFECTIVENESS OF BANK CAPITAL ADEQUACY REGULATION IN CHINA

Abstract

This paper studies whether the choice of capital ratio at China commercial banks are more influenced by regulatory or market forces. Two models of equity to capital ratio under the regulatory and market regimes were reconstructed and modified from the literature to be suitable to China banks. These two regimes are combined in a disequilibrium model and empirically tested on unbalanced panel data during 2006-2010 using exogenous switching regression. The results indicate that most Chinese commercial banks are influenced by regulatory forces.