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Impacts of capital regulation and market discipline on capital ratio selection: evidence from China

Author

Listed:
  • Lei Xu
  • Shih-Cheng Lee
  • Yishu Fu

Abstract

Purpose - – The purpose of this paper is to examine the impacts of capital regulation and market discipline when China imposed most of the Basel I requirements between 2004 and 2010. Design/methodology/approach - – Following Barrios and Blanco (2003) and Rime (2001), the authors apply disequilibrium and simultaneous measurements to identify the financial safety net underlying capital movements as well as the changes in credit risk levels in China’s banking sector. Findings - – The authors discover that capital regulation outweighs market discipline by an average probability of 0.65-0.35 in the contribution to bank capital movements when banks significantly improve their capital buffers. In addition, the banking sector lowered its risk levels in the sample period. Research limitations/implications - – The findings suggest that the largest bank-based economy has consolidated its financial system for future expansion. Originality/value - – China’s banking sector requires closer examination of capital and risks provided by its emerging significance in the financial world. Thus, this study contributes to current literature.

Suggested Citation

  • Lei Xu & Shih-Cheng Lee & Yishu Fu, 2015. "Impacts of capital regulation and market discipline on capital ratio selection: evidence from China," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(3), pages 270-284, June.
    • Handle: RePEc:eme:ijmfpp:v:11:y:2015:i:3:p:270-284
    DOI: 10.1108/IJMF-02-2014-0021
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    Citations

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    Cited by:

    1. Ahmed Imran Hunjra & Qasim Zureigat & Rashid Mehmood, 2020. "Impact of Capital Regulation and Market Discipline on Capital Ratio Selection: A Cross Country Study," IJFS, MDPI, vol. 8(2), pages 1-13, April.
    2. Lei Xu & Qian Liu & Bin Li & Chen Ma, 2022. "Fintech business and firm access to bank loans," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4381-4421, December.
    3. Long Wu & Lei Xu, 2022. "Bank loans and firm environmental information disclosure: Evidence from China's heavy polluters," Australian Economic Papers, Wiley Blackwell, vol. 61(1), pages 42-71, March.
    4. Wu, Long & Xu, Lei & Jiang, Ping, 2023. "State-owned venture capitals and bank loans in China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    5. Ghulame Rubbaniy & Ali Awais Khalid & Stathis Polyzos & Balqees Naser Almessabi, 2022. "Cyclicality of capital adequacy ratios in heterogeneous environment: A nonlinear panel smooth transition regression explanation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1960-1979, September.
    6. Pan, Ailing & Xu, Lei & Li, Bin & Ling, Runze, 2020. "The impact of supply chain finance on firm cash holdings: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).

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