Impacts of Capital Adequacy Regulation on Risk-taking Behaviors of Banking

Based on the dynamic nature of banks' continuous operation, this article examines the effects of capital adequacy requirement on bank's risk-taking behaviors, and furthermore empirically investigates the impacts on Chinese commercial banks from the implementation of the capital standard, Regulation Governing Capital Adequacy of Commercial Banks. The theoretical model concludes that the optimal ratio of risk assets decreases while the capital ratio increases, and an increase in capital-to-asset ratio would reduce the risk-taking behavior. Meanwhile, the empirical evidences suggest that changes in capital is negatively associated with the changes in risk in a significant way, thus implying that increasing capital ratio would be effective in reducing portfolio risk with the implementation of Regulation Governing Capital Adequacy of Commercial Banks.