Chen, S. Y., Lin, Y. T., and Hwang, D. Y. 1995. An Investigation on the Effectiveness of Regulation on Bank Capital Adequacy under Alternative Models. NTU Management Review, 6 (2): 001-024
Shen-Yuan Chen, Graduate Institute of Finance, Ming Chuan College, Taipei, Taiwan, R.O.C.
Yu-Tsung Lin, Department of Finance, National Taiwan University, Taipei, Taiwan, R.O.C.
Dar-Yeh Hwang, Department of Finance, National Taiwan University, Taipei, Taiwan, R.O.C.
Abstract
This paper attempts to investigate the effectiveness of regulation on bank capital adequacy by applying alternative models, including flat-rate deposit insurance premiums, risk-based deposit insurance premiums, stochastic deposit interest rate and portfolio theory. Our results show that under all alternative models except flat-rate deposit insurance premiums, the regulation on bank capital adequacy is not definitely effective. Since there exists a correlation between bank asset returns and deposit interest rate, the higher the correlation is, the lower the effectiveness of regulation will be. We conclude that whether bank capital regulation is effective or not depends on the effect of bank capital increase on both bank's risk and return, i.e., whether the regulation of bank capital adequacy can reduce the probability of bank failure.
Keywords
Capital ratio Capital regulation Bank failure Bankruptcy Deposit insurance