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Capital regulation, regulatory avoidance, and bank systemic risk

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

Abstract

Capital regulation is a core measure of modern financial regulation, but banks' regulatory avoidance behavior may affect the control effect of capital regulation on systemic risk. This study evaluates the control effect of capital regulation on bank systemic risk from the perspective of regulatory avoidance. We employ sample data from 42 Chinese listed banks from 2013 to 2023. The results reveal that as capital regulatory standards are improved, the impact of capital regulation on bank systemic risk changes from a suppressive effect to an exacerbating effect, and there is a ‘U-shaped’ relationship between the two. This impact is related to regulatory evasion behavior. The higher the capital regulatory standards, the greater the degree of bank regulatory evasion, and the weaker the control effect of capital regulation on bank systemic risk. Furthermore, this study investigates the mechanism by which capital regulation affects bank systemic risk. The results reveal that the cost compensation effect, risk correlation effect, and loss aggravation effect will all positively regulate the impact of capital supervision on bank systemic risk.

Suggested Citation

  • Miao, Wenlong & Ma, Yuxian & Xu, Haoran, 2025. "Capital regulation, regulatory avoidance, and bank systemic risk," International Review of Financial Analysis, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:finana:v:100:y:2025:i:c:s1057521925000894
    DOI: 10.1016/j.irfa.2025.104002
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