Do capital requirements affect cost efficiency? Evidence from China

•We study the relation between capital ratio and bank efficiency for Chinese banks.•We take advantage of the regulatory changes in capital requirements over the period 2004–2009.•We find that the increase in capital ratios has a beneficial effect on cost efficiency.•This effect depends on the bank's ownership type.

This paper contributes to the debate on the effect of capital requirements on cost efficiency. We study the relation between capital ratio and cost efficiency for Chinese banks over the period 2004–2009, taking advantage of the profound regulatory changes in capital requirements that occurred during this period to measure the exogenous impact of an increase in the capital ratio on banks’ cost efficiency. We find that such an increase has a positive effect on cost efficiency, the size of which depends to an extent on the bank's ownership type. Our results therefore suggest that capital requirements can improve cost efficiency.