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Because of the innovation of financial markets and several
deregulations,the safety of banks is getting more and more
important.There are different issues in different theory.State
Preference Theory and Option Pricing Modelimply that capital
regulation could reduce bank risk-taking behavior.However,
Mean-Variance claims regulation will cause the increase of the
riskof bank failure. This study concerns the effect of
risk-based capitalregulation,bank''s adjustment of capital
and risk. The data used in this study are collected from
local commercial banksduring 1985 to 1995. We use traditional
capital ratio to evaluate capitaladequacy consistently,and
two point of views to evaluate bank risk,considering the
influence of risk-based capital regulation on bank defaultrisk
and relevant beta risk,in terms of regulator and investor,
respectively.The final conclusions are as following: (1)After
the declaration of capitalregulation in 1989,bank default risk
tends to decline. (2)We could observe anegative cross-sectional
correlation from 1980 to 1993, significant positivecorrelation
from 1980 to 1992,which seems to be inconsistent. (3)In
theinteractive analysis, the increase of capital adequacy
will lead thedecrease of bank risk,which matches State
Preference Theory and OptionPricing Model. On the contrary,
the increase of bank risk won''t lead thedecrease of capital
adequacy adjusted by bank. So Bank behavior won''t bedominated
by bankruptcy costs,agency costs and regulation costs.
(4)Theadjustment of bank capital adequacy is determined by
previous capital level,bank size, organization differences,
liquidity, profitability and macrofactors.The adjustment of
bank risk is determined by previous risk level,organization
differences and macro factors.
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