Regulation, Competition and Bank Risk: Evidence from China

Abstract

This paper uses the semi-annual data of 16 listed banks from the fourth quarter of 2005 to the second quarter of 2016 as the research sample to study the impact of supervision and competition on the listed bank's risk in China. The results show that the higher level of bank holdings (capital adequacy ratio and core capital adequacy ratio) can significantly reduce the combined risk of banks and increase bank stability. Increased liquidity (liquidity ratio and deposit-loan ratio) can reduce bank risk, but this effect is not significant. The more fierce competition among banks (the smaller CR) will not only increase the proportion of weighted risk assets in total assets, but also increase the bank's bankruptcy probability and reduce the overall operating stability of the bank. It is necessary for authorities of policy to strengthen supervision of banking industry, especially the capital adequacy ratio and core capital adequacy ratio regulation and keep the competition of banks under the appropriate interval. It is also necessary for regulators to comply with the latest regulations of Basel III to set up more reasonable liquidity regulatory indicators to meet liquidity risk management.