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Effect of capital constraints on risk preference behavior of commercial banks

Effect of capital constraints on risk preference behavior of commercial banks Purpose – The purpose of this paper is to analyze how the financial supervision authority utilizes the restrictions of capital constraints imposing on commercial banks the need to develop the macro economy. Design/methodology/approach – This paper uses multilateral game to deduce the loan characteristics of banks, vector and void coordinates to analyze the behavior choices of banks under capital supervision, sets up an index to describe the risk preference of banks, and analyzes the process with Chinese data empirically. Findings – This paper finds big banks have a loan preference for big enterprises and small banks have a preference for establishing a bank syndicate to pursue large projects. Further, the paper notes the conditions by which the heterology banks choose loans across the border and proves that changes of capital requirements would force the credit structure of the commercial banks to adjust along an efficient frontier broken line or an efficient frontier plane under the conditions of interest rate regulation or interest rate marketization, respectively. Research limitations/implications – It is very complex to describe the choices of risk behavior of banks and the simple supervision method needs to be adjusted. Practical implications – This paper finds that banks show risk preferences of credit structure, and capital constraints would affect it greatly; regulators should guard against capital constraint softening. Originality/value – It is the first time that the conditions of banks beyond the loan border have been studied and the behavior adjustment of banks using the vector and void coordinate analyzed. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Effect of capital constraints on risk preference behavior of commercial banks

China Finance Review International , Volume 1 (2): 19 – Jan 28, 2011

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References (37)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/20441391111100741
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to analyze how the financial supervision authority utilizes the restrictions of capital constraints imposing on commercial banks the need to develop the macro economy. Design/methodology/approach – This paper uses multilateral game to deduce the loan characteristics of banks, vector and void coordinates to analyze the behavior choices of banks under capital supervision, sets up an index to describe the risk preference of banks, and analyzes the process with Chinese data empirically. Findings – This paper finds big banks have a loan preference for big enterprises and small banks have a preference for establishing a bank syndicate to pursue large projects. Further, the paper notes the conditions by which the heterology banks choose loans across the border and proves that changes of capital requirements would force the credit structure of the commercial banks to adjust along an efficient frontier broken line or an efficient frontier plane under the conditions of interest rate regulation or interest rate marketization, respectively. Research limitations/implications – It is very complex to describe the choices of risk behavior of banks and the simple supervision method needs to be adjusted. Practical implications – This paper finds that banks show risk preferences of credit structure, and capital constraints would affect it greatly; regulators should guard against capital constraint softening. Originality/value – It is the first time that the conditions of banks beyond the loan border have been studied and the behavior adjustment of banks using the vector and void coordinate analyzed.

Journal

China Finance Review InternationalEmerald Publishing

Published: Jan 28, 2011

Keywords: Commercial banks; Loans; China; Capital; Government policy

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