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The diminishing marginal effect of the capital adequacy ratio on the control of bank risk-taking

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  • Miao, Wenlong
  • Ma, Yuxian
  • Xu, Haoran

Abstract

Capital adequacy ratio is a crucial instrument for curbing bank risk-taking and plays a pivotal role in maintaining the stability of bank operations and protecting them against unanticipated losses. However, banks are institutions that operate with risk and may have an incentive to take risks in pursuit of high returns, irrespective of their true capital adequacy ratios. To verify the relationship between capital adequacy ratio and bank risk-taking, this study analyzes the actual impact of capital adequacy ratio on bank risk-taking based on data from 330 Chinese commercial banks from 2009 to 2023. The study found that the capital adequacy ratio exhibits a diminishing marginal effect on bank risk-taking. When the capital adequacy ratio is low, increasing the capital adequacy ratio can inhibit bank risk-taking. However, as the capital adequacy ratio increases, its inhibitory effect gradually diminishes. The impact is predominantly observed in banks with higher risk management capabilities, convenient capital expansion, higher liquidity, and weak profitability. Furthermore, we analyze the asset and risk expansion mechanisms of the capital adequacy ratio controlling bank risk-taking. The analysis demonstrates that the increase in the capital adequacy ratio will promote the expansion of bank assets and risks, thereby weakening its restraining effect on bank risk-taking.

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  • Miao, Wenlong & Ma, Yuxian & Xu, Haoran, 2025. "The diminishing marginal effect of the capital adequacy ratio on the control of bank risk-taking," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001354
    DOI: 10.1016/j.najef.2025.102495
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