Effect of capital constraints on risk preference behavior of commercial banks

Abstract

PurposeThe 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/approachThis 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.FindingsThis 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/implicationsIt is very complex to describe the choices of risk behavior of banks and the simple supervision method needs to be adjusted.Practical implicationsThis 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/valueIt 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.