Adjustment of Bank Capital Ratios

Abstract

This study explores the speed of adjustment of the capital ratio, regulatory ratio, and tier-‎I ‎ratio of ‎commercial banks in China by employing the GMM framework ‎from ‎‎2006 to 2020. The empirical ‎analysis reveals that banks adjust their regulatory ratio and tier-I ‎ratio faster than the capital ratio of ‎Chinses commercial banks. The findings report that the pace of ‎regulatory ratio, a tier-I ratio of ‎well-capitalized, highly liquid, and high growth banks are faster than ‎under-capitalized, low liquid ‎and low growth commercial banks in China. In addition, the speed ‎of adjustment of regulatory ‎ratio, the tier-I ratio is faster than capital ratio during the GFC-2008 in ‎China. These ‎findings suggest ‎that the regulators may consider the heterogeneity in the speed of ‎capital adjustment ‎across ‎different bank characteristics to formulate new bank regulations; ‎particularly, when ‎assessing and ‎adjusting the specific capital requirements through Pillar II of the ‎Basel III agreement.‎