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Do capital requirements affect cost efficiency? Evidence from China

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  • Pessarossi, Pierre
  • Weill, Laurent

Abstract

This paper contributes to the debate on the effect of capital requirements on cost efficiency. We study the relation between capital ratio and cost efficiency for Chinese banks over the period 2004–2009, taking advantage of the profound regulatory changes in capital requirements that occurred during this period to measure the exogenous impact of an increase in the capital ratio on banks’ cost efficiency. We find that such an increase has a positive effect on cost efficiency, the size of which depends to an extent on the bank's ownership type. Our results therefore suggest that capital requirements can improve cost efficiency.

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  • Pessarossi, Pierre & Weill, Laurent, 2015. "Do capital requirements affect cost efficiency? Evidence from China," Journal of Financial Stability, Elsevier, vol. 19(C), pages 119-127.
    • Handle: RePEc:eee:finsta:v:19:y:2015:i:c:p:119-127
    DOI: 10.1016/j.jfs.2014.11.002
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    Cited by:

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    8. Karmakar, Sudipto, 2016. "Macroprudential regulation and macroeconomic activity," Journal of Financial Stability, Elsevier, vol. 25(C), pages 166-178.
    9. Vighneswara Swamy, 2018. "Basel III capital regulations and bank profitability," Review of Financial Economics, John Wiley & Sons, vol. 36(4), pages 307-320, October.
    10. Jitka Lesanovska & Laurent Weill, 2015. "Does Greater Capital Hamper the Cost Efficiency of Banks?," Working Papers 2015/10, Czech National Bank.
    11. Changjun Zheng & Anupam Das Gupta & Syed Moudud-Ul-Huq, 2017. "Do market competition and development indicators matter for banks’ risk, capital, and efficiency relationship?," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-27, June.
    12. Michele Fabrizi & Elisabetta Ipino & Michel Magnan & Antonio Parbonetti, 2016. "Real Regulatory Capital Management and Dividend Payout: Evidence from Available-for-Sale Securities," CIRANO Working Papers 2016s-57, CIRANO.
    13. Sunil Mohanty & Hong-Jen Lin, 2021. "Efficiency in China’s Banking Sector: A Comparative Analysis of Pre- and Post-Basel II Eras," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 24(02), pages 1-29, June.
    14. Do Van Anh,, 2022. "Does better capitalization enhance bank efficiency and limit risk taking? Evidence from ASEAN commercial banks," Global Finance Journal, Elsevier, vol. 53(C).
    15. Abreu, Emmanuel Sousa de & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2019. "What is going on with studies on banking efficiency?," Research in International Business and Finance, Elsevier, vol. 47(C), pages 195-219.
    16. Chepngenoh, Florence & Muriu, Peter W & Institute of Research, Asian, 2020. "Does Risk-Taking Behaviour Matter for Bank Efficiency?," OSF Preprints n7r2c, Center for Open Science.
    17. Saeed, Momna & Izzeldin, Marwan & Hassan, M. Kabir & Pappas, Vasileios, 2020. "The inter-temporal relationship between risk, capital and efficiency: The case of Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    18. Zhenni Yang & Christopher Gan & Zhaohua Li, 2019. "Role of Bank Regulation on Bank Performance: Evidence from Asia-Pacific Commercial Banks," JRFM, MDPI, vol. 12(3), pages 1-25, August.
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    More about this item

    Keywords

    Bank; Capital requirements; Efficiency; China;
    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

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