Effectiveness of China's Commercial Banks' Capital Adequacy Ratio. Regulation

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1 Effectiveness of China's Commercial Banks' Capital Adequacy Ratio Regulation A Case Study of The Listed Banks Li Yuanjuan Master, College of Economics and Management, Sichuan Agricultural University, Chengdu, Sichuan, China (611130) Xiao Shishun Associate professor, College of Economics and Management, Sichuan Agricultural University, Chengdu, Sichuan, China (611130) Abstract Prime crisis detonated fully exposed the risks of high leverage ratio of financial institutions operating,on the analysis of the effectiveness of capital adequacy is even more important. At present, China's banking capital adequacy ratio is not entirely from external capital markets and bank performance improvement, and also the supervision of the superior pressure. Found in the regression analysis on the combined data of the 14 listed banks, China's listed banks' capital adequacy supervision must have the effect of showing. Continue to enhance the effectiveness of the capital adequacy ratio regulation. Key words:the Capital Adequacy Ratio; Regulation Introduction The capital adequacy ratio is a comprehensive index to reflect the risk of banks, but also the bank's asset-liability management one of the benchmark targets. In practical use, the banks are not only using the capital adequacy ratio to measure their own risk, but also through this objective comparison of the indicators with industry, so that the capital adequacy ratio has a universal significance. The relationship between financial regulation and innovation in the global financial crisis detonated by the U.S. subprime mortgage crisis in 2008 has become more complicated and confusing. The U.S. subprime mortgage crisis evolved into the global financial crisis, mainly due to the bubbles of the network technology, financial innovation and financial supervision of the over-relaxation and backward evolution for the huge financial risk. Once this risk of the release, may lead to greater domino effect, the loss of a greater range and depth. From the situation in China, a special case. Foreign mainstream media have pointed out that China's financial sector openness and lack of innovation is the key factor for China to escape the financial crisis. Crisis, the strategic significance of the capital adequacy regulation is once again highlighted the effectiveness of China's banking capital adequacy regulation is more practical significance. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 58

2 Status of the Capital Adequacy Ratio of Commercial Banks in China At present, due to the rapid development of China's banking industry is only the last 30 years, many of the bank's capital adequacy ratio has not yet standard, the banking sector capital adequacy regulatory level is relatively low, the bank's capital adequacy is largely the management of capital adequacy.for many banks, capital adequacy ratio standards just because of regulatory pressure, rather than capital market pressures, but not bank performance to enhance the premise. In accordance with the CBRC promulgated in February 2004 the provisions of The Management Regulations for the capital adequacy ratio of commercial bank,commercial banks capital adequacy ratio calculated as follows: Capital adequacy ratio = (core capital + subsidiary capital - net of items) / (riskweighted assets times of market risk and operational risk capital required) According to regulations, the commercial bank's capital should include two aspects of the core capital and supplementary capital. The core capital includes paid-up capital or common stock, capital surplus, earned surplus, retained earnings and minority interests; subsidiary capital including revaluation reserves, general reserves, preferred stock, convertible bonds and long-term subordinated debt. However, in calculating the capital adequacy ratio should be excluded deductions. In the core capital, in addition to the increase of a minority stake, will also last year's undistributed profits included in core capital. Subsidiary capital, used to make up for the special preparation of the extent of the loss of each loan risk classification and other preparations are retained according to the provision of a certain percentage of the total loan balance, used to make up the general provisions of the not yet identified the possibility of loss, removed. Beginning in 1998, in order to supplement the capital of the four state-owned commercial banks, the State through the financial capital injection, stripping bad assets, retained profits into capital, tax rebates and direct or indirect way to allow the issue of subordinated debt and other state-owned commercial banks' capital adequacy ratio to a certain extent improved. March 1, 2004 implementation of the "capital adequacy ratio of commercial bank management approach", January 1, 2007 the final compliance deadline for the capital adequacy ratio of commercial banks (capital adequacy ratio of 8%),during the transition period, did not meet the commercial banks to develop a viable capital replenishment plan. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 59

3 Table 1 The Capital Adequacy Ratio Table Of China's 16 Listed Banks In 2005 To 2010 Name Bank of Beijing Industrial and Commercial Bank Everbright Bank Huaxia Bank Construction Bank Bank of Communications Minsheng Banking Bank of Nanjing Bank of Ningbo Agricultural Bank of China Shanghai Pudong Development Bank SDB Industrial Bank China Merchants Bank Bank of China China CITIC Bank Source: Bank Annual Report Listed banks in the listing and financing as well as strategic investors, the level of capital adequacy ratio is relatively high data more accurate. From Table l shows that the annual data of listed banks in 2005 to 2010 study found that China's listed banks capital adequacy ratio (CAR), the fluctuation range of some of the more special data have Everbright Bank, Nanjing Bank, Agricultural Bank, dark hair. bank brown CITIC Bank.Everbright Bank in 2005 and 2006, capital adequacy ratio is negative, in the 2007 after the successful injection of capital adequacy ratio changed to 7.11%; Agricultural Bank of total assets and asset structure of major changes in 2008 do not provide the capital adequacy ratio data, while Bank of Nanjing and China CITIC Bank, for reasons listed in 2007, capital adequacy ratio of a substantial increase, respectively, increased from 11.74% and 8.11% to 30.67% and 15.27%, much higher than listed banks 12.2% of the average level. Comparison of data from 16 banks over the past few years, the bank's capital adequacy ratio was tended to stabilize after increasing every year, the average capital adequacy ratio of 16 listed banks rose from 8.81% to 12.07%. More than the average level of the world's top ten banks. Also found that due to the end of 2008, the subprime mortgage crisis in the first half of 2009, with the surge of China's bank COPY RIGHT 2012 Institute of Interdisciplinary Business Research 60

4 lending, the banks have suffered a downturn caused due to a large number of lending capital adequacy ratio of. An Empirical Study of the Effectiveness of Supervision of Capital Adequacy Ratio of Commercial Banks in China China's capital adequacy ratio is not too long, the empirical analysis of the effective supervision of capital adequacy ratio is still very difficult, so start from the analysis of the relevant variables of the bank's capital adequacy ratio, in order to analyze the During this period China's capital adequacy ratio of the effectiveness of supervision. The impact on the earnings of commercial banks. In theory, undercapitalized under regulatory supervision of China's state-owned commercial banks' capital adequacy ratio is the best capital ratios and how the relationship between regulatory capital ratios can not be determined, the capital adequacy ratio to enhance the value of state-owned commercial banks is not determined. For joint-stock commercial bank's capital adequacy ratio, in fact, the regulatory capital adequacy under, then according to the theory of the previous analysis of bank capital structure and banks value the relationship, regardless of how the best capital ratios and regulatory capital ratios, capital adequacy ratio regulation should be at least relatively effective. Universal capital is much higher than the 8% minimum capital adequacy ratio standards, and asset expansion can bring economies of scale to enhance the value of the bank, when the reach of banks to maximize the value of the critical point, if the capital at this time adequate higher than minimum capital adequacy ratio standards, on behalf of the interests of the shareholders of the bank's management has the incentive to the liabilities of alternative capital financing, coupled with a serious shortage of banking information asymmetry and market binding, banks continue to increase debt levels, but reduces the value of the bank. This is the capital adequacy ratio under the supervision of "moral hazard" problem. Joint-stock commercial banks to pursue economies of scale and expand the assets of the excessive growth but reduced the value of the bank, so in theory the value of listed banks may be increased and then decreased. Here the level of the value of the return on assets (ROA), return on net assets (ROE), earnings per share (EPS) on behalf of commercial banks in the debt ratio, return on capital increase also means the profits of commercial banks increase, an important source of capital of commercial banks in China is the current period profits surplus to increase the profitability will improve the capital adequacy ratio of commercial banks, the positive correlation should exist between the two. Impact on the level of risk. In theory, the regulatory capital adequacy ratio, limiting the size of bank loans, will cause the decrease of the loan ratio; because of the bad assets need to provision for doubtful accounts prepared in accordance with the caliber of new capital regulation, these adverse prepare will not be included in bank capital, and the end of fully part is also deducted from the net capital, which makes the bad assets directly to the loss of bank capital, bank deposit-loan ratio and NPL ratio, capital adequacy ratio theory is a negative correlation. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 61

5 Model Design Sample Selection This study sample data China's 16 listed commercial banks to remove the Special Data of the Agricultural Bank and Everbright Bank, of which 14 cross-sectional data (the data for the synthetic data, real-time sequence with the cross-section of mixed data), including:bank of Beijing Industrial and Commercial Bank of China, Huaxia Bank, China construction Bank, Bank of Communications, Minsheng Bank, Bank of Nanjing, Bank of Ningbo, Shanghai Pudong Development Bank, Shenzhen Development Bank, Industrial Bank, China Merchants Bank, China Bank, China CITIC Bank. The data from the Bank annual report. Data processing and analysis using SPSS 20 software. Variable Definition The capital adequacy ratio (CAR) as a dependent variable, the indicators reflect the level of bank risk and capital structure. In addition to select the following indicators: return on assets (ROA), return on net assets (ROE), earnings per share (EPS) as explanatory variables, these three indicators are to a certain extent, on behalf of the bank's profitability. The improvement of these three indicators is to increase the profits of commercial banks, thus helping to improve the capital adequacy of commercial banks, so there should be a positive correlation between them with the capital adequacy ratio. In addition to the introduction of the deposit and lending on behalf of commercial banks' liquidity ratio and on behalf of the commercial bank asset quality, non-performing loan rate (PBL). Deposit ratio reflects the bank's balance sheet to reflect the rate of expansion of the bank, bank deposit and lending than the higher, more risk-weighted assets and capital adequacy ratio is negatively correlated; performing loan ratio of non-performing loans in total the proportion of loans. Was negatively correlated with the capital adequacy ratio should. Variable defines the specific Table 2. Variable type Banks' profitability Banks' liquidity Quality of bank assets Banks' level of risk Table 2 List Of Variables Defined Variable Variable Variable meaning and name symbol calculation Net profit / (beginning of Return on period total assets + end of ROA total assets period total assets) / 2] 100% Return on net (Net profit / shareholders' ROE assets equity) 100% Earnings per share EPS Net profit / total equity Deposit-loan LDR (Total loans / total ratio Nonperforming loan ratio Capital Adequacy Ratio PBL CAR deposits) 100% [(Substandard loans + doubtful loans + loss loans) / loans] 100% (Total capital / total risk than the whole capital) 100% COPY RIGHT 2012 Institute of Interdisciplinary Business Research 62

6 Model Based on the above analysis, the total rate of return on assets, return on net assets, earnings per share, deposit-loan ratio and the rate of non-performing loans as explanatory variables, multiple linear regression model to analyze the relationship between capital adequacy ratio of bank performance. Model are as follows: The Empirical Results Analysis of Tests Can be seen from the data in Table 3, model fitting and high correlation coefficient (R) = 0.770, determination coefficient (R side) = 0.593, the adjustment factor (adjusted R-square) = The model description of the change of the capital adequacy ratio is better, closer to the true value of the capital adequacy ratio from the fitted values. Table 3 Model Summary R-squar adjusted R- Standard estimates of error squar predictor variables: (constant), the rate of bad loans, deposit-loan ratio, earnings per share, return on assets, return on net assets rate Analysis of Variance Table 4 shows the model regression effect is very significant. F value = , Sig = 0.000, proved variable significant at the level. Table 4 Anova a Model Sum of squares df Mean square Regression b Residuals Total 69 7 a.variables: capital adequacy ratio b.predictor variables: (constant) non-performing loan rate and deposit-loan ratio, earnings per share, return on assets, return on net assets rate Regression Results and Analysis It can be seen from the data in Table 5, for every 1% increase in capital adequacy ratio, return on assets increased by 6.620%, while the return on net assets decreased by 0.400%, 0.990% increase in earnings per share, including return on total assetsrate and the capital adequacy ratio showed a significant positive correlation, while the rate of return on net assets and earnings per share and the capital adequacy ratio, respectively, the performance of a weak negative correlation and positive correlation. This means that the capital adequacy ratio of bank performance seemingly contradictory results show that the level of capital adequacy ratio and bank earnings showed a clear positive relationship between a certain range. And the COPY RIGHT 2012 Institute of Interdisciplinary Business Research 63 F Sig.

7 world's leading banks, the effectiveness of bank capital adequacy regulation in China is not all significant, which is unique to China's banking capital adequacy effectiveness of the "paradox". In bank asset quality and liquidity, the selected financial indicators of non-performing loan rate and deposit-loan ratio and capital adequacy ratio showing a negative correlation, but the impact factor is not obvious. Table 5 Coefficient Model 1 Non-standardized coefficient Standardize d coefficients COPY RIGHT 2012 Institute of Interdisciplinary Business Research 64 t Sig. B Standard error (constant) ROA ROE EPS LDR PBL Dependent variables: capital adequacy ratio Significant positive correlation between the capital adequacy ratio of commercial banks and bank performance level of a certain range, indicating that the capital adequacy requirements on China's commercial banks, has only played a regulatory role to play to a certain extent to resist risks role. In theory, the capital adequacy ratio reflects the riskresisting ability of commercial banks, will the public to play a signaling role, but our government implicit guarantee of commercial banks to make the signal lost some role in the With Government, as guarantor under the premise of residents deposits like commercial banks can be used as capital. With the maturing of China's economic system and the regulation has become increasingly standardized and strict capital adequacy ratio of commercial banks must meet a mandatory targets, in the role of commercial banks in China is growing significantly. The Results possible Causes 4.1 Bank Characteristics of Monopolistic Competition in the Industry Disappear, to Improve the Effectiveness of Capital Adequacy Regulation. Absolute monopoly of state-owned commercial banks has been broken, after 30 years of reform and development, decreased market share despite the entry threshold of the banking sector is still very high, the number of private banks and the scale of the continuous development of the reform. With the competition in the banking industry is slowly highlights the lack of competitive makes the performance of China's banking phenomenon has gradually changed from monopolistic competition, performance gradually improved from the level of capital adequacy.

8 4.2 Government's Implicit Guarantee of the Bank, the Importance of bank Capital Adequacy Regulation is not Completely the Performance Under The ultimate control theory, at present, China's listed banks are controlled by the Government, the capital of these banks must contain non-book of the national credit intangible capital, there is no need to maintain a higher capital adequacy ratio, but more shouldering the responsibility of the government regulation of the economy. Western banks in developed countries most market-oriented institutions, obligations of the bank does not have to support the government at a critical moment to help the troubled bank's logic only "too big to fail", and our government a large number of shares held by the bank, and is the controlling shareholder, so there is a certain paternalism tendency; the same time, China is currently in the development of catch-up phase, the bank will play a key role in the stateowned corporate finance and economic development, the government often The banking industry is very care. Therefore, when the Government's policies tend to support the banking sector and the government will be for the banking industry may face risks and losses "endorsement" that the banks may appear to the profits to banking, risk to society ", this may lead to commercial banks their opportunistic behavior. From the relationship between the Government and the banks, the government's implicit guarantee of inhibition of the process of improvement of banks' capital adequacy regulatory system, the effectiveness of capital adequacy regulation is difficult to fully embody. 4.3 Imperfect Institutional Environment Some scholars have pointed out that the effect of regulatory and institutional environment, better system in developed countries, the effect of regulation is also better; supervision in developing countries is often accompanied by inefficiency, corruption; governments in developing countries tend to fall into the plight of the regulation : market order is not good supervision and control, supervision and control over-serious corruption. According to their logic, that is, only when the market environment, capital adequacy supervision may increase the operating performance of the bank's capital adequacy may be detrimental to a system environment is not healthy market. From reality, China's banking industry is indeed facing the embarrassing predicament of supervision: the globalization of China's weak banking sector needs capital adequacy regulation, but the inexperience and immaturity of the institutional environment may lead to capital adequacy regulation is not complete. Therefore, as one of the countries in transition and emerging market countries, capital adequacy validity able to take full advantage of the premise may be to improve the quality of government, and a sound market environment. 4.4 Capital Adequacy Regulation only to meet the Capital Adequacy Ratio Standards In accordance with the spirit of the Basel II capital adequacy high levels of not only the operational stability of the commercial banks beneficial, but should also be conducive to the efficiency of its operations, through the effect on the banking business behavior, style and strategy and thus its long-term development have a positive a positive impact. Accompanied by the intensification of the information asymmetry between the dispersion as well as an agent of the bank shares, Bank excessively scraped investment behavior will be a large degree of inhibition to ensure the stability of the banking operations. On this basis, the bank's income is reasonable and safe. Considerations of foreign banks operating efficiency is COPY RIGHT 2012 Institute of Interdisciplinary Business Research 65

9 naturally an important factor to maintain higher capital ratios. On the contrary, our bank's capital adequacy ratio is often a mere formality: the large-scale bank listed before 2005, the capital adequacy ratio of the level of the domestic banking institutions preached apparent low status; In recent years, the Bank through the market or the introduction of strategic investors capital adequacy ratio has been greatly improved performance and capital adequacy of the bank is not comprehensive and positive relationship. Our country there are still some banks to capital adequacy regulation is only to understand, did not establish a complete set can promote the performance and stability of banks capital adequacy regulatory system as a core capital adequacy ratio of the number of standard. Capital adequacy regulation is reduced to a rigid standard indicators, inhibiting the capital adequacy regulatory validity. Continue to Strengthen its Capital Adequacy Ratio Supervision of capital adequacy ratio is not completely effective reflection of the embarrassing predicament of China's banking sector: As China's banking industry be able to resist the invasion of the sub-prime crisis because non-market factors, regulatory failure of the capital adequacy ratio also reflects the development of China's banking industrythere is a series of drawbacks. China is a signatory of the Basel Agreement, if not actively improve our capital adequacy regulation is bound to directly affect the credit rating of the state-owned commercial banks, as well as the internationalization of banks operating in China. The subprime mortgage crisis makes capital adequacy in the Basel core is becoming more and more accepted in Europe, the United States and other developed market economies, as a gradual integration into the global economy and is becoming an important force in the global economy banking, the normalization of the capital adequacy regulation and institutionalization is the right choice. Therefore, the strengthening of China's banking industry's capital adequacy. Actively Improve the Market Constraint Functions The capital adequacy regulation for the "import", developed by developed market countries in order to address the rapid development of the banking sector, its premise is a perfect market constraints. Improve the capital market constraints: First, to strengthen the bank's credit rating. Banks often through a variety of efforts to maintain a good credit rating results. The second is to actively promote the reform process of the interest rate market. At present, banking transactions, the main interest rate pricing is still largely in government hands. Only increase the market-oriented interest rate reform, expansion of banking transactions subject directly involved in the opportunities and rights of the interest rate pricing, thereby inhibiting the excessive risk-taking behavior of banking operations. The third is the establishment of explicit deposit insurance system as soon as possible. The establishment of explicit deposit insurance system, in a sign the government guarantee will disappear, while the bankruptcy of the banking operations, and also shows that the main responsible of the banking operations increased gradually. 5.2 Improve the Corporate Governance Structure of China's Banking Industry The capital adequacy of China's banking regulatory effectiveness of the important reasons is the complex relationship of banks and the government led to corporate governance mechanisms are inadequate. China's banking industry should be to build a diversified COPY RIGHT 2012 Institute of Interdisciplinary Business Research 66

10 ownership structure mechanisms and decision-making mechanisms; of checks and balances to actively promote the strength of the banks listed on the inside and outside, to overcome the state-owned commercial banks entrusted in the proxy chain defects, and improve the supervision mechanism of the market voting with their feet and hand vote ; to establish and improve the general meeting of shareholders, board of directors, board of supervisors and senior management, including corporate governance framework; to establish a resultsoriented incentive and restraint mechanisms; improve the information disclosure system to enhance the transparency of the decision-making and management of banks' risk management, enhanced shareholder transparency of information, increase supervision of the bank's controlling shareholder, effective control of the related party transactions, and inhibit the bank's opportunistic behavior; the formation of the intrinsic motivation of banks to raise capital and reduce the risk of the restraint mechanism, prompting commercial banks to establish capital constraints as the core business growth patterns and resource allocation, security, liquidity and profitability of harmonization, to promote the stable development of the banking system. Sound Banking Market Environment The effectiveness of capital adequacy regulation must rely on a healthy market environment, such as perfect competition in the market environment and the macroinstitutional environment. To improve the effectiveness of bank capital adequacy regulation, further increase China's market reform, improve the market allocation of resources, and specification of the scope of the functions of government, government banking relationships to create a standardized, clear, beware of the capital adequacy regulatory system trap "; should be relaxed into the control and barriers of the banking sector, strengthening of bank competition in the market, making the majority of financial institutions under the same conditions of fair competition. To create a "competitive" banking market, to ensure that banks in a normal competitive market environment. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 67

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