Risk-based capital adequacy in assessing on insolvency-risk and financial performances in Taiwan's banking industry

Abstract

This study applies the index of insolvency-risk (IR) to the failure risk in Taiwan's banking industry during 1993–2000, to explore the relationship between capital adequacy (CA) in assessing on IR and financial performances. Specifically, the current work is to indicate the diverse effects before and after the revision of capital-adequacy regulation in Taiwan, that is, at the end of 1998. The empirical results show a positive relationship between the CA and the IR index, and a significantly positive relationship exists between the CA and various financial performances. Alternatively, it shows a significantly negative relationship between IR and financial performances. This work provides sound and safe suggestions about risk management for all the stakeholders, government, banking and financial industry.