金融裁罰與企業經營對資本適足率之影響—以臺灣銀行業為例 - 政大學術集成

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(1)國立政治大學社會科學學院行政管理碩士學程第十八屆碩士論文. 政治大金融裁罰與企業經營對資本適足率之影響—以臺灣銀行業為立. ‧ 國. 學. 例. ‧. Effects of Financial Penalties and Enterprise Operations on. Taiwan.. n. al. er. io. sit. y. Nat. the Capital Adequacy Ratio — A Case of the Banking in. Ch. engchi. i n U. v. 指導教授王信實博士研究生. 楊裕如撰. 中華民國一百零七年六月. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(2) 中文摘要本文主要探討除法令規範項目外，不同因素對銀行資本適足率的影響為何？本研究使用台灣 27 家上市、上櫃以及興櫃的國內銀行為樣本、共 619 個觀察值，納入關鍵解釋變數：金融監管壓力、競爭與股權結構；同時考慮創新研發及銀行經營業務相關的特定變數，採取二階段最小平方法，進行衡量內生性情況之追蹤資料迴歸分析。經誤差項異質性修正後，結果發現政府不同的監管方式/態度對銀行資本適足率形成兩種顯著的相反效. 政治大. 果，銀行本身競爭力的強弱、董監持股比率與創新研發的投入，亦對資本. 立. 適足率產生不同的顯著作用；而部分銀行的特定變數亦然。金融監管者將. ‧ 國. 學. 資本適足率作為政策工具彈性運用時，可審慎思考這些因素對銀行資本適. ‧. 足率之影響，掌握銀行承擔損失的能力與意願，不致弄巧成拙，損害了金融的審慎監理或抑制了銀行創新等發展。. sit. y. Nat. al. n. 異質性. er. io. 關鍵字：資本適足率、金融監管、競爭、股權結構、追蹤資料內生性分析、. Ch. engchi. i n U. v. i. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(3) Abstract In addition to the regulatory items, this study mainly investigates the impact of other different factors on banks’ capital adequacy ratios. This study uses 619 observations, and 27 banks from listed, over-the-counter (OTC) or emerging stock companies in Taiwan as samples. The capital adequacy ratios model contains the financial regulatory pressure, competition, and shareholding structure three key explanatory variables; at the same time, it takes the level of the bank’s innovation and the operation-related variables into consideration.. 政治大. Applying the two-stage least squares method in the panel regression analysis to. 立. resolve the endogenous situation and the Arellano approach to revise the. ‧ 國. 學. heterogeneity, this study finds that the different regulatory attitudes/ ways of the. ‧. government have two opposite effects on the bank's capital adequacy ratios.. sit. y. Nat. Banks’ competitiveness and the percentage of the majority shareholder holdings. io. er. also have different significant effects on them; so do parts of bank-specific variables. When financial regulators use the capital adequacy ratios as an. al. n. v i n Cshould incentive tool of policies, they the impact of these factors on the U h e n consider i h gc. capital adequacy ratios. Therefore, regulators can furthermore grasp banks’ ability and willingness to undertake losses, and apply the capital adequacy ratio appropriately to enforce policies without impairing financial prudential supervision. Keywords: Capital adequacy ratios, financial supervision, competition, ownership structure, endogenous analysis of panel data, heterogeneity. ii. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(4) Contents 中文摘要 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I I CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I I I LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V I LIST OF APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V I I 1. 政治大. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 立. 1.1 RESEARCH B ACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. ‧ 國. 學. 1.2 RESEARCH MOTIVES AND S PECIFIC O BJECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. ‧. 1.3 RESEARCH E XTENT AND L IMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. sit. y. Nat. io. al. n. 2.. er. 1.4 RESEARCH FRAMEWORK AND C ONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. v. THEORIES AND EMPIRICAL LITERATURE REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Ch. engchi. i n U. 2.1 F INANCIAL R EGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 2.1.1 Capital Theory and Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 2.1.2 The Influence of Financial Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 2.2 M ARKET C OMPETITION IN B ANKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 2.2.1 Market Competition Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 2.2.2 The Market Competition of Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 2.3 O WNERSHIP S TRUCTURE AND C APITAL ADEQUACY R ATIOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 iii. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(5) 3. DATA AND DESCRIPTIVE STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 3.1 D EPENDENT V ARIABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. 3.2 I NDEPENDENT V ARIABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4 3.2.1 Key Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4 3.2.2 Other Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 4.. EMPIRICAL MODEL AND METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 4.1 T HE C APITAL ADEQUACY R ATIO (CAR) M ODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2. 政治大. 4.2 T WO -S TAGE LEAST S QUARES M ETHOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3. 立. EMPIRICAL RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9. ‧ 國. 學. 5.. 5.1 K EY V ARIABLE : F INANCIAL R EGULATION , C OMPETITION , AND O WNERSHIP S TRUCTURE . . . . . . . 4 9. ‧ y. sit. n. al. er. CONCLUSION AND SUGGESTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. io. 6.. Nat. 5.2 T HE O THER V ARIABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. i n U. v. REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1. Ch. engchi. APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5. iv. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(6) List of Tables T ABLE 1: FINANCIAL S UPERVISORY C OMMISSION , R.O.C. RELEASED NEW R EGULATIONS OF C APITAL A DEQUACY AND CAPITAL C ATEGORY OF B ANKS TO RESPOND TO B ASEL III IN 2012. 5 T ABLE 2: V ARIABLE DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 T ABLE 3: CORRELATION COEFFICIENTS M ATRIX OF VARIABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 T ABLE 4: DESCRIPTIVE STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 T ABLE 5: U NOBSERVED B ANKS ’ V ARIABLES SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 0 T ABLE 6: M ODEL SELECTION TEST - CAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9. 政治大. T ABLE 7: E STIMATION RESULTS: DIFFERENT M ETHODS C OMPARED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. v. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(7) List of Figures F IGURE 1: RESEARCH F RAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 F IGURE 2: T HE T REND OF THE S AMPLE B ANKS’ CAPITAL ADEQUACY R ATIOS . . . . . . . . . . . . . . . . . . . . . . 2 7 F IGURE 3: F REQUENCY D ISTRIBUTION – M ONETARY PENALTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 F IGURE 4: F REQUENCIES OF F INED AND O THER E NFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 F IGURE 5: HETEROSCEDASTICITY ACROSS THE S AMPLE B ANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. vi. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(8) List of Appendices A PPENDIX 1: T HE T ICKER S YMBOLS AND ABBREVIATIONS OF S AMPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5. A PPENDIX 2: T HE CORRELATION C OEFFICIENT M ATRIX OF V ARIABLES IN THE AMOUNTS OF THE M ONETARY PENALTIES (MP) M ODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6. A PPENDIX 3: T HE CORRELATION C OEFFICIENT M ATRIX OF V ARIABLES IN RETURN ON A SSETS (ROA) M ODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7. A PPENDIX 4: T HE CORRELATION C OEFFICIENT M ATRIX OF V ARIABLES IN THE PERCENTAGE OF THE. 政治大. M AJORITY (MS) M ODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7. 立. A PPENDIX 5: I NSTRUMENTAL V ARIABLE TEST OF MP - F REQUENCIES OF F INED. . . . . . . . . . . . . . . . . . . . 6 7. ‧ 國. 學. A PPENDIX 6: I NSTRUMENTAL V ARIABLE TEST OF ROA - REVENUE PER PERSON (REV.P) . . . . . . . . . 6 8. ‧. A PPENDIX 7: I NSTRUMENTAL V ARIABLE TEST OF MS – THE NECESSARY CONTROL OF E QUITY. y. Nat. n. al. er. io. sit. (NCS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9. Ch. engchi. i n U. v. vii. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(9) 1 Introduction 1.1 Research Background In recent thirty years, banking has been expanding their business toward globalization, and the Basel Committee on Banking Supervision stipulated Basel Accord from 1988 for regulating countries’ capital requirement to enhance the stability of international banking system and prevent different regulations of nations from causing unfair competition.. 治政大 long-term assets, but this Banks use massive short-term debts to support 立. situation often interlinks intricately with banks themselves, their counterparties. ‧ 國. 學. and even with the decisions making of another field. So complicated that it. ‧. causes a systemic financial crisis naturally. Historically, financial turmoil also. sit. y. Nat. happened during the period of economic recession and disorder. Banks’ capital might eliminate rapidly because the value and quality of their assets alter when. er. io. encountering unexpecteda shocks and facing increasing risk. Lacking enough. n. iv l C n level of capital, banks’ ability tohabsorb lossesi would e n g c h U decline and the probability of bankruptcy increase. That is the reason why regulators ask financial institutions to keep adequate capital and pay attention to their corporate governance. (Blundell-Wignall and Atkinson, 2010).. To guard against the situation to induce systemic risk and the competitiveness collision of financial institutions in the globe, the Basel Committee on Banking Supervision formulated the capital adequacy ratios as. the guidelines for banks’ minimum capital holding, and it became effective 1. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(10) in Dec. 1992. The capital adequacy ratio (CAR) is a method to estimate the adequate capital of a bank and expresses the rate of its risk-adjusted credit exposure. The defined formula of capital adequacy ratio is the percentage that regulatory capital divided by risk-weighted assets. In detail, regulatory capital contains Tier 1 capital and Tier 2 capital. In Basel III, the Common Equity and the additional capital compose the former; the revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt designated as supplementary capital constitute the latter together. Tier. 政治大 capital plays the role to立 absorb losses when a clearing-off event happened 1 capital can assimilate a bank’s losses and ensure its operating. Tier 2. ‧ 國. 學. and is less protective and secure for depositors. In Basel II stage, it led Tier 3 into the eligible regulatory capital of banks, i.e., it took the credit risk on. Nat. sit. y. ‧. the assets of financial institutions into them.. io. er. The financial crisis of 2008 exposed the fragility of the financial system. al. and the defects of Basel II. Those too-big-to-fail financial institutes chased risk. n. v i n deucedly and caused a seriesCofhdomino effect. U e n g c h i Hence, to enhance more stable developments of the financial market and the elasticity when encountering economic shocks, the Basel Committee decided to amend the contents as Basel III in Dec. 2010. During Basel I, it modified the minimum capital adequacy ratio that a financial institution should maintain 8%, Tier 1 capital should keep in the level of 4%, and Tier 1 plus Tier 2 capital need to hold at least in 8%. In Basel II, it instructed how to reckon the minimal level of supervised capital ratios, defined clearness of supervised capital, and confirmed the minimum capital adequacy ratio 8 %. Basel III adjusts the associated regulatory capital: at all 2. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(11) times, (1) common equity in Tier 1 should maintain not less than 4.5% of riskadjusted assets, (2) Tier 1 capital ought to be not less than 6.0% of risk-adjusted assets, (3) capital adequacy ratio must keep at least 8.0%. The Financial Supervisory Commission, R.O.C had also released “Regulations Governing the Capital Adequacy and Capital Category of Banks “ November 26, 2012, to fit the standard of Basel III system gradually. It set this regulation to assist banks in calculating their capital adequacy ratio and qualifying their self-owned capital. The Financial Supervisory Commission,. 治政 R.O.C raised the legal minimum requirement of 大capital adequacy ratio from 立 2013. For the detail, Common Equity Ratio, Tier 1 capital, and CAR must ‧ 國. 學. achieve to 3.5%, 4.5% and 8% separately in 2013, and attain to 7%, 8.5%, and. ‧. 10.5% individually until 2019. Table 1 presents this information explicitly.. new standards of capital adequacy ratios now.. er. io. sit. y. Nat. According to official data, most of the banks in Taiwan have already met the. n. a l and Specific Objective v i 1.2 Research Motives n C hengchi U. From the research background, banks should keep a suitable percentage of capital to pay debts and prevent risk assets from suffering the possibility of financial shocks and losses. The capital adequacy ratio is a minimal standard to regulate banks’ capital holding, ensures their safe operation and protects depositors. The Financial Supervisory Commission, R.O.C issued the corresponding adjusted regulations of banking in 2012. The main content it released was new capital requirements that enforce Taiwan financial market to fit the criteria of Basel III gradually from 2013 to 2019. Most of Taiwan banks 3. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(12) have already met the new standards of capital adequacy ratios until now, and some of them have been even keeping more capital than regulatory requirements in the extended period. This situation also implies that when facing risks, banks have more preparation and responsibility to deal with them than choosing to go into bankruptcy. However, banking faces more challenges, such as the changing financial environment, the developing FinTech, and the outspreading financial business, in the future stable operating and risk management. Moreover, the government. 政治大. plans to take capital adequacy ratio as a flexible tool in coordination with the. 立. policies. In such a background, banks would encounter more risks than before. ‧ 國. 學. and have some incentives and reasons to keep fewer capital adequacy ratios.. ‧. Their ability and willingness to shoulder losses might be affected indirectly.. sit. y. Nat. Hence, to discuss what kinds of the impact that the different factors cause on. io. er. banks’ capital adequacy ratios in Taiwan is an important issue. Are financial regulations the main reason that leads banks’ capital adequacy ratios in Taiwan. al. n. v i n Ch to change? Is the market competition else? This study examines how e n gorcother hi U. different factors cause influence on banks’ capital adequacy ratios. Then, according to the research result, it will provide some suggestions for future research and give some advice to supervisors or policymakers’ references. Therefore, they can consider banks’ prudential supervision, financial stability carefully, and enhance bank's ability and willingness to undertake losses, especially in the changing financial environment. If they want to implement policies by lessening banks’ capital adequacy ratios as an inducement, they will not worsen financial prudential supervision eventually. 4. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(13) Table 1: Financial Supervisory Commission, R.O.C. Released New Regulations of Capital Adequacy and Capital Category of Banks to Respond to Basel III in 2012.. Year. 2013. 2014. 2015. 2016. 2017. 2018. 2019. CAR Ratio. 8.0. 8.0. 8.0. 8.625. 9.25. 9.875. 10.5. Tier 1 capital Ratio. 4.5. 5.5. 6.0. 6.625. 7.25. 7.875. 8.5. 3.5. 治政大 4.0 4.5 5.125. 5.75. 6.375. 7.0. Common Equity Ratio. ‧ 國. The Bank's capital adequacy ratio (CAR ratio), Tier 1 capital ratio and the common equity ratio of the bank in each year shall not be lower than the above rates. ”Year” means dates from January 1 to December 31 of the year.. er. io. sit. y. Nat. 2.. Unit (percentage). ‧. 1.. 學. *Note：. 立. *Resource： ”Regulations Governing the Capital Adequacy and Capital Category of Banks,” Financial Supervisory Commission, R.O.C. http://law.fsc.gov.tw/law/NewsContent.aspx?id=3919. n. al. Ch. engchi. i n U. v. 1.3 Research Extent and Limitations The research adopts domestic banks in Taiwan as samples because of the possibility and integrity of data collecting. The extent of this study mainly discusses how different variables affect banks’ capital adequacy ratios in Taiwan. Thus, this study observes the pressure of financial supervision, the situation of financial market competition, and the ownership structure, and uses the other bank-specific variables at the same time to explore the core of this research. 5. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(14) Because Financial Supervisory Commission, R.O.C only released the official information of the financial penalties and the non-monetary enforcement from 2012, this study chooses sample data in Taiwan since 2012 to 2017 from Taiwan Economic Journal (TEJ) Database and the official website of Financial Supervisory Commission, R.O.C.. Owing to lacking complete banking database in Taiwan, like BanksCope, this study adopts financial penalties and non-monetary corrections executed on. 政治大 governance to represent the level of bank regulation pressure. In addition, one 立 banks’ inappropriate behaviors of operation and investment or their corporate. ‧ 國. 學. of the original ideas is to test whether banks take corporate social responsibility (CSR) to be the competition strategies will affect their capital ratios. However,. ‧. it still meets a problem that there are no complete CSR indices about Taiwan. sit. y. Nat. banking. Hence, this paper replaces it with the ownership structure data from. er. io. TEJ. Besides, some banks do not provide complete information on financial. n. reports for the research period, so this study has no choice a v but only gives them. i l C n U This study will expound h e as up, and choose 27 domestic banks n gsamples c h i finally. more details in part 3.. Another limitation of this study is the source of data. It would be better to select banks’ variables from the financial statement which follows the International Financial Reporting Standards (IFRS) because the content of IFRS 9 is more close to the structure Basel Accord III. However, there are still some missing values in TEJ database, and some banks do not provide enough information publicly. It might need more time to look for these lost data, but 6. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(15) maybe they are still missing. Thus, this study tries to apply banks’ variables from traditional financial statements to get complete data. The differences between the financial statement of IFRS edition and the traditional one are that IFRS categorizes more detailed subdivisions than traditional original items, especially about risk management dimension. Nevertheless, this study focuses on financial regulations, banks’ operating activities and management, like competition and shareholders structures, so it would not cause too much divergence whether the other banks’ variables collected from financial statement of traditional edition. 政治大 complete IFRS data in the 立future.. or IFRS. Researchers can improve this shortcoming when they can get banks’. ‧ 國. 學. 1.4 Research Framework and Contribution. ‧. sit. y. Nat. As mentioned above, this paper hypothesizes that different variables. io. er. generate impacts on banks’ capital adequacy ratios. This study separates the. al. explaining variables into two categories: the first part includes key variables and. n. v i n C h the financial Umarket regulation, engchi. focuses on banks’. competition, and the. ownership structure; the second part regarded in the study is the other variables such as the level of the bank’s innovation and their specific operational factors. Figure 1 depicts the research framework and expresses the relationship between the dependent variable (the capital adequacy ratio, CAR) and the independent variables. The independent variables contain the financial regulation, competition (ROA), and the ownership structure of three key variables, and control variables (bank-specific variables.) Among the independent variables, the financial regulation has the amounts of the monetary penalty (MP) and the 7. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(16) frequencies of the non-monetary enforcement (OE) two elements, and the ownership structure includes the percentage of the majority shareholder holdings (MS) and the ratio of the cash flow claim (CFC). Moreover, this research considers the problem of the endogeneity about the amounts of the monetary penalty, ROA, and the percentage of the majority shareholder holdings. It uses some instrument variables (frequencies of fined (Freqsofined), revenue per employee (REV.P) and the ratio of the necessary control of equity (NCS)) separately to deal with the situation. Furthermore, they will affect the dependent. 政治大 expound more content in立 the section of the model set.. variables to generate influence on the capital adequacy ratios. The study will. ‧ 國. 學. Parts of the previous theoretical and empirical literature have already. ‧. investigated the relationship among the capital adequacy ratios and financial. sit. y. Nat. performance, efficiency, risk exposure or asset liquidity, and the capital. io. er. adequacy ratios were one of the explaining variables. Some related researches. al. discuss banks stability, risk or capital ratio (It is just the rate of capital to assets. n. v i n C hother analyses adopt without considering risk). The e n g c h i U the capital adequacy ratios. as the main topic and a dependent variable, but they do not think the influence of regulation, competition, ownership structure, innovation and the other variables in their model at the same time; in reality, these variables should affect the capital adequacy ratios simultaneously. Hence, this research uses capital adequacy ratio as an explained variable and considers more associated factors as explaining variables, and hope to find the outcome closer to the realistic situation. Besides, it adopts the panel regression with instrumental variables to deal with endogeneity and get findings that some literature support, and because it 8. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(17) discusses the distinct dimension in the model, the study also gains exciting results that are different from the past.. 立. 政治大. ‧ 國. 學 Figure 1: Research Framework. sit. y. ‧. Nat. Resource: Author. n. er. io. 2. Theories and Empirical Literature Review al v i n From the developmentC of h the Basel CapitalU e n g c h i Accord, we can understand that it concerns the banks’ capital and risk. In this section, the first part introduces related theory and literature about capital and capital requirements and the effect of the financial regulations. Financial regulations include supervisions, restrictions on their activities or the capital requirements of banks, and the literature review concentrate on the effect of the financial regulations on banks’ capital adequacy ratios or risk. The second segment concentrates theories on market competition and the relationship between banking competition and banks’ capital ratios or risk. The final part focuses on the ownership structure and 9. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(18) reviews related literature. How the ownership structure would affect risk or banks’ capital adequacy ratio is another discussed issue. Reviewing the theoretical and empirical literature provide us some references to select variables.. 2.1 Financial Regulations 2.1.1 Capital Theory and Capital Requirements The common concept that informed agents may collaborate inside automatically and benefit themselves from harming uninformed agents is real,. 治政 and it affects financial regulations, too. Because 大 the operating activities of 立 financial industries are dissimilar to those of the others, financial institutes ‧ 國. 學. usually possess more information than uninformed firms. Hence, the capital. ‧. structures of them have such different characteristics. That is why some opinions. sit. y. Nat. debate that deposit insurance is a public issue and the government should set it. io. al. er. as the public policy (Kyle, 1985; Grinblatt and Ross, 1985; Gorton and. n. Pennacchi, 1990). In Diamond and Raghuram bank capital theory, there is a tight and dilemma relationship. v i n C h bank assetU and liability between engchi. (Diamond and. Raghuram, 2000): banks with higher capital levels can lessen the financial crisis; however, liquidity also decreases in this situation. They made out that the capital structure affects banks’ liquidity making, the costs of encountering a crisis, and the capability of pressing borrowers’ repayment, the three parts. Thus, people should not ignore the impact of the regulatory capital requirements and the deposit insurance. Besides, if capital requirements in the financial market could not mirror that a bank's capital holdings are not socially optimal to cover its default riskiness of negative externalities, this situation is the main reason why 10. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(19) capital regulation is received attention. (Rime, 2001:3). Schaeck K. and M. Cih´ak interpreted explicitly at the beginning of their article; if there is no limitation, banks may face some incentives to take risk immoderately by handling high levels of leverage. Policymakers try to avoid this negative situation from spreading, so they set regulations to require financial industries maintaining the least standards of capital (Schaeck K. and M. Cih´ak, 2012).. 2.1.2 The Influence of Financial Regulations. 政治大. How does capital regulations affect bank risk-taking behavior?. 立. Theoretically, the literature in the finance develops two opposite directions. On. ‧ 國. 學. the utility maximizing, the researchers used the mean-variance framework; it suggests that a stringent capital regulation on risk-averse banks will cause. ‧. bankruptcy to increase and risk exposure of deposit insurance to rise. However,. Nat. sit. y. on the strand of the option literature, it has an inconsistent viewpoint and. er. io. analyzes that strict capital regulations implemented on banks that have a neutral. n. attitude to risk or chasinga lmaximized profits will lessen i v the risk exposure under. n U i e n gand c hFurlong the deposit insurance structure. Keeley (1990) presented that such. Ch. a viewpoint could not support the conclusion because it did not regard the option value of the deposit insurance. From the view of empirical literature, Rime (2001) examined that banks’ activities had desired influence on banks behavior for the expected penalties imposing on those violating capital requirements. His model discussed the decision of capital levels and risks simultaneously. The variables that had an impact on banks' capital and risk included bank size (total assets of banks), 11. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(20) current profits, current loan losses and regulatory pressure. This research concluded further that there is not only a positive but also a significant impact on the capital ratio that regulatory pressure cause to; yet, it is not the same effect on banks’ behavior of risk-taking. Brewer et al. (2008) adopted the major domestic policy, bank regulation, bank-specific variables, the country’s macroeconomic circumstance, and the financial feature to investigate 78 headquartered of private banks in the world among 12 industrial countries during 1992 to 2005. Their research demonstrated that most of the bank-specific. 政治大 influence: a country. variables had an important effect on bank capital ratio; moreover, some policy. 立. factors also had significant. had more strict capital. ‧ 國. 學. requirements and corrected banks' behaviors eagerly, so its banks would keep higher capital ratios. Also, smaller bank size and more effective corporate. ‧. governance structure have the same significant effect on capital ratios. Francis. Nat. sit. y. and Osborne (2012) indicated that capital requirements for banks play a. er. io. significant role in banks’ internal capital target, i.e., banks modify their targeted. n. a lchange of capital requirements. capital ratios to reach the i v They revise capital,. n U i n g c h between assets, and loans according to theedifference realistic capital ratios and. Ch. their adjusted target. Francis and Osborne (2012) obtained the testimony that some events affect banks capitalization and then brings influence on banks’ lending activity, balance sheet and capital growth through a “bank capital channel,” and this finding could be a reference for regulators to evaluate the potential impact on the future capital requirement. Kirilenko and Lo (2013) surveyed the historical growth of algorithmic trading and presented some economic perspective, “Financial Regulation 2.0”, 12. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(21) to regulators. As the reflection of Moore’s Law, the excellent development of the semiconductor industry has affected our entire society, and brought the financial system into the Digital Age, too. Maybe proposed policy and regulation doing nothing would help to decrease costs of keeping a continuous market presence and trading efficiently, but it would be hard to consider a fair and orderly market; on the contrast, specific ban or capital requirement raise costs. Facing this rapid technical changing, the structure of our financial regulation seems to fall behind easily. Kirilenko and Lo (2013) thought that contemporary regulation should. 政治大 Platform-Neutral” to reduce 立 risk and encourage innovation. In other words, regard “Systems-Engineered, Safeguards-Heavy, Transparency-Rich, (Trading). ‧ 國. 學. financial regulations have a significant influence on the risk of financial institution and innovation.. ‧. sit. y. Nat. After all, financial institutions usually have information advantage than. io. er. the others; if there is no limitation, banks may have a moral hazard to take risky. al. activities with high levels of leverage. To avoid such negative externalities,. n. v i n Ctohensure that financial regulators set required capital e n g c h i U industries would maintain the least standards of capital. Higher capital levels defend economic shocks but sacrifice liquidity. Policymakers cannot underestimate the result that capital requirement and deposit insurance may affect liquidity creating, the costs of banks facing a crisis, and banks’ ability to force borrower repayment. From the viewpoint of theory, mean-variance model proves capital regulations cause banks to expose bankruptcy risk, but, on the contrast, Keeley and Furlong (1989) adopted the reference of the option-pricing model, debated the shortcoming of the mean-variance framework in this issue and supported that strict regulations 13. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(22) reduce banks risk exposure. Reviewing empirical literature, Rime (2001) concluded that regulatory pressure exists a positive and significant influence on capital ratio; however, it will not create incentives for banks’ behavior of risktaking. Brewer et al. (2008) demonstrated that a country has more strict capital requirements and corrects banks behaviors enthusiastically will lead its banks to keep higher capital ratios. Francis and Osborne (2012) indicated that banks adjust their targeted capital ratios to react the change of capital requirements as positive correlation; besides, the shocks of banks capitalization affect banks. 政治大 would help to decrease 立 the costs of keeping a continuous market presence and operating through a “bank capital channel.” Financial regulators did nothing. ‧ 國. 學. trading efficiently in this Digital Times, but it would be hard to consider a fair and orderly market. Hence, Kirilenko and Lo (2013) presented “Financial. ‧. Regulation 2.0” focused on the importance of contemporary regulation to reduce. Nat. sit. y. risk and encourage innovation. The financial regulation can subdivide into two. er. io. categories here: capital requirements and other financial regulations such as. n. financial corrects and a supervisions in rapid FinTech i v development. By the l. n U n g c h i should pay attention to financial literature, we can understand whye policymakers. Ch. rules, and how financial regulations can affect capital ratio to vary, produce chain effect to banking management and further affect financial stability and innovation.. 2.2 Market Competition in Banking 2.2.1 Market Competition Theories According to the introduction of J.A. Bikker, K. Haaf (2000) and Leon 14. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(23) (2014), we can understand the degree of market competition in banking mainly from two categories: structural analysis and non-structural analysis when reviewing previous theories discussed it.. Structural analysis. The structural analysis presents that market structures would affect firms’ market conducts and further, their market performance. This opinion originated from Industrial Organization Theory envelops “Structure–Conduct–Performance. 治政 (SCP)” paradigm (Bain, 1933) and the efficiency 大 hypothesis and so on. The 立 SCP examines whether stronger market power will increase the collusion of 1. ‧ 國. 學. larger banks and then promote their better market performances and the. ‧. efficiency hypothesis investigates if a high level of market power can improve. sit. y. Nat. the efficiency of larger banks. People usually use such as the number of firms,. io. er. the k-firms concentration ratio (CRk) and Herfindahl-Hirschman Index (HHI), to be the indices of the market structure. CRK measures the top k firms’ market. al. n. v i n share of in the industry, yet itCleaves distribution of remaining firms out h e ntheg size chi U of consideration. The H-H Index (HHI) includes more data of the complete firm size distribution that means market share of each firm 2 , and if we get the index to be 1, the state of market competition is a monopoly situation.. 1. Handbook on the History of Economic Analysis. III. Edward Elgar Publishing. (Gilbert Faccarello, Heinz D. Kurz (ed.), 2016: 297) 2 The calculating method of HHI is aggregating all firms’ squares of the market share, and it can be written as below: 𝒏𝒏. 𝐇𝐇𝐇𝐇𝐇𝐇 = � 𝐬𝐬𝒊𝒊𝟐𝟐 ,. ∀𝒊𝒊 = 𝟏𝟏, … … , 𝒏𝒏. 𝒊𝒊=𝟏𝟏. In this equation, the whole firms’ quantity is n. For equal-sized firms, the ranges of the HHI index can be gauged by 1/n. 15. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(24) Non-structural analysis The view of new empirical industrial organization (NEIO) can be one of the representatives of non-structural analysis. The scholars of NEIO observe firms’ activities and use econometric methods to estimate the level of market power. The early stage of NEIO rooted on the static model of competition and the oligopoly theory, and the Iwata test (1974), the Bresnahan approach (1982), the Lerner index, the conjectural variation model and the Panzar-Rosse (PR). 政治大. revenue model (1987) can be the representatives.. 立. Among them, the PR revenue model assumes that the market is under long-. ‧ 國. 學. term equilibrium. It adopts an individual firm’s revenue and price of factors to estimate H-statistics for measuring the situation of market competition. Many. ‧. scholars use this model because of its simplification to use. The Lerner index is. y. Nat. io. sit. another method that researchers use to measure the degree of market competition.. er. It estimates the controlling power on the market, and its value is between 0 and. n. a. v. 1. Smaller the value is, thel weaker n i making is; on the contrast, C the power of price. hengchi U. larger it is, lower the level of market competition is 3 . If the situation of the market is perfect competition, Lerner index equals 0; however, if the market is a monopoly, the Lerner index is approximate to 1. HHI or CRk calculates only one index annual year, but the Lerner index is different from them: it can count each value for every sample.. 3. The Lerner index of firm i can be known simply as following formula: 𝟏𝟏 𝑷𝑷 − 𝑪𝑪′ 𝑳𝑳𝒊𝒊 = − = 𝜺𝜺 𝑷𝑷 ε is the price elasticity of demand, P represents market price and 𝑪𝑪′ is the marginal cost of firm. 16. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(25) Afterward, Boone (2008) proposed the extending method according to the concept that the efficient firms get more profits in the competitive market, and it is the Boone indicator. It is one of the other non-structural measures, and the notion of market competition has already developed from static analysis to focusing on dynamic change of the market at this time 4 . Whether Lerner index or Boone indicator, they are straightforward to estimate the market competition in banking; nonetheless, one of the defects they have as all non-structural methods do: in their assumption, banks provide. 治政 homogenous goods and service (Leon, 2014). 大立 ‧ 國. 學. 2.2.2 The Market Competition of Banking. ‧. The situation of market competition is one of the factors that economics. sit. y. Nat. or financial literature have discussed what affect banks’ risk-taking activities and. io. al. n. and empirical research.. er. the level of capital ratios. This idea develops two opposite strands in theoretical. Ch. hi. en. i n U. v. g c viewpoints think that the degree of On the one hand, general theoretical financial regulatory freedom and banks’ competition have a positive relation. Keeley (1990) used the state preference model presented by Furlong and Keeley (1990) to analyze actual data that whether the increasing level of market competition would motive banks to decrease the charter values, and then induce them to increase asset risks and reduce capital; thus, the possibility of default 4. Boone indicator can be shown as the equation: 𝒍𝒍𝒍𝒍𝝅𝝅𝒊𝒊 = 𝜶𝜶 + 𝜷𝜷𝜷𝜷𝜷𝜷𝒄𝒄𝒊𝒊 + 𝜺𝜺𝒊𝒊 In this formula, 𝝅𝝅𝒊𝒊 means the profits of bank i and 𝒄𝒄𝒊𝒊 represents the cost of it; 𝒄𝒄𝒊𝒊 is the substitute of efficiency at the same time. 17. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(26) raises. Keeley (1990) used Tobin’s q to measure the market power, and the reason why he chose Tobin’s q was that either the asset, deposit market, or even both could reflect the capitalized value of monopoly rent, but not the costs of acquired assets could reflect that. Although deposit insurance would generate moral hazard and induces banks to reduce their capital holding, the empirical result indicated that declining charter value would counteract this risk, and policymaker should focus on the reform of deposit insurance. Most of all, the conclusion supports the hypothesis that if banks have greater market power, they. 政治大 have a lower possibility of 立bankruptcy. Therefore, Keeley (1990) manifested that will keep higher the ratio of the market value capital to the asset; i.e., they also. ‧. ‧ 國. 學. increasing the level of market competition would not induce banks’ default.. However, there are the different views from Keeley and think that when. sit. y. Nat. the level of competition in the financial market rising, it will cause banks’ more. er. io. risk-taking activities and thus corrodes banks’ franchise or charter value, induces. n. banks to increase gambling a behaviors and decrease v activities in prudence. i l C n h e ntogthe (Hellmann, et al., 2000). According Hellmann et al. (2000) i U c hconception,. used an economic model to discuss how capital requirements and deposit-rate controls affect banks actions. Capital-requirement regulation can motivate banks’ action discreetly, but generate the result of Pareto-inefficient; at the same time, they also blight banks' franchise values that cause banks’ wagering behaviors. Regulators can use deposit-rate as a policy means and modulate whole welfare to Pareto-efficient achievement for increasing banks’ franchise values.. Then, we review the issue of financial market competition from the 18. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(27) empirical literature and find that many types of research support the negative relationship between market power and banks' default. Boyd and Nicoló (2005) inspected the empirical literature and found that banks’ choice of raising risky portfolios do not concur with the increasing market power; in fact, it is a mix situation. Furthermore, Boyd and Nicoló (2005) modified the model of Franklin and Gale (chapter 8, 2000) by bringing a loan market and other markets interaction into the model and concluded the opposite result. They presented that when considering these factors, the conventional conception becomes. 政治大 power, borrowers might立 chase higher risk projects when facing more funding. unsupported anymore. Because banks rise loan rates by their increasing market. ‧ 國. 學. costs. Berger et al. (2009) used the Lerner index, HHI deposits, and loans to measure bank competition and concentration. He put forward that market power. ‧. in the loan market will cause a higher risk of loan portfolios; however, whole. Nat. sit. y. bank risks do not increase necessarily as long as they retain their high franchise. er. io. value through enhancing equity capital or by other methods to lessen risks. Miera. n. a l a static model of Cournot and Repullo (2010) adopted i v competition basing the. n U e nwith hi g cimperfect setting of Boyd and Nicoló (2005) correlation in a loan market. Ch. and found that competition and the risk of bank bankruptcy have a U-shaped relationship. Jiménez et al. (2007) used banks number, C5, HHI and Lerner indices to estimate the level of competition on deposit and loan market. Furthermore, they also manipulated the macroeconomic condition (GDP growth rate at time t and t-1) and bank-specific factors simultaneously (ROA, the total market share of loan size and the ratio of commercial loan to total assets) in their regression model. The result indicated that when adopting Lerner indices to 19. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(28) investigate the market concentration of Spanish banking system, market power, and bank failure are negative related and this stands that the franchise value (the assumption of market power) is significant of reducing banks to take risky behaviors.. To summarize the literature of market competition mentioned above, we can understand the different methods to measure the degree of market power from a theoretical base whatever structural or non-structural analysis and their. 政治大 about banking competition and banks’ failure; then find two reverse debates on 立. comparative shortcomings and advantages. Moreover, we peruse the theory. ‧ 國. 學. this issue. Whatever market competition induce banks’ risk behaviors to increase or change toward to the contrary situation, it might affect the size of their risk-. ‧. er. io. sit. Nat. and this is the main point that the research will focus.. y. adjusted weighted assets; that means it will affect banks’ capital adequacy ratio. al. The article by Schaeck and Cihák (2012) is close to the consideration in. n. v i n C hcompetition as U this study. They adopted banks’ e n g c h i the key variable to analyze how banks’ capital ratio vary; otherwise, size, a group of controlled factors, deposit insurance, and shareholder equity were the other independent variables in their capital ratio equation. Schaeck and Cihák (2012) used two alternative means to measure competition, the first approach is H-Statistic (Panzar and Rosse, 1987), and the second way is the density of bank, that is the ratio of banks to the natural logarithm of the population. They presented that competition will lead banks to keep more capital holding, and more powerful shareholder rights and transactional or relationships lending activities have the critical relationship with 20. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(29) the higher level of capital ratios. Their conclusion is another opposite result to those think that policymakers should regulate banks’ operation stringently to limit competition activities. Although their particular analyzation, the research of Klaus and Martin is still different from this study. They used the capital ratio as the dependent variable that is calculated only by the ratio of equity to total assets without regarding risk-weight. This study will focus on the influence of the distinct competitive variable different from the past research on the capital adequacy ratio. More details will describe in the following parts.. 政治大 2.3 Ownership Structure and Capital Adequacy Ratios 立. ‧ 國. 學. Shehzad et al. (2010) investigated the effect of the ownership. ‧. concentration on banks riskiness that uses capital adequacy ratio and the namely. sit. y. Nat. non-performing loan as the proxies. They adopted the indicator from Bureau Van. io. er. Dijk’s Banks Cope database as the representation of the ownership concentration. al. and sorted the data into three parts: in the first part, they gave at least one owner. n. v i n C h a dummy variable with more than 10% shareholdings e n g c h i U one and other else zero. Then, in the second section, they set at least one owner with greater than 25% shareholdings a dummy variable one and other else zero. Finally, Shehzad et al. (2010) used a dummy variable one to represent that at least one owner's shareholdings are above 50% and other else zero. Their research presents that the ownership concentration is a significant negative influence on the nonperforming loans ratios with the specification of supervisory control and shareholders’ protected rights. Moreover, it significantly raises the capital adequacy ratio in the condition of the shareholder's protected right; furthermore, 21. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(30) if banks with weak the two condition, the ownership concentrations are the important factor to decrease banks’ riskiness. After reviewing theories among banks’ risk-taking, ownership and management structures, and regulations for banks, Laeven and Levine (2008) transacted an empirical analysis of these theories. They detected that the empirical finding is consistent with theories, i.e., more powerful the owners are, greater risk they want to take; nevertheless, strict shareholder protection laws might dent the relationship between them. Besides, research may get mistaken. 治政 and fragmentary conclusion about the influence大 of capital regulations, deposit 立 insurance and restraints on banks’ risk activities when omitting the factor of the ‧ 國. 學. ownership structure. According to such a view, therefore, this study adopts the. ‧. ownership structure to build the ideal capital adequacy ratios model.. y. Nat. sit. Another interesting study about the ownership structure investigated the. a. er. io. different issue. Barry et al. (2011) used the data of European commercial banks. n. and examined how the ownership structure of privately i v or publicly owned banks l. n U i e n gthat c h individuals, found. Ch. affect risk differences. They. families or banking. institutions having higher proportions of ownership might make the risk of the asset and the probability of default decline than privately owned banks; moreover, when investors and non-financial companies keep more capital shares, they may enforce banks to choose risk-taking. However, publicly held banks do not have any influence in the same condition, but market power is influential to their risk activities; besides, publicly owned banks decrease credit risk and bankruptcy if banking has more capital share. 22. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(31) According to the literature mentioned above, we can find some different conclusions about the ownership concentration and the different effect on privately, families or publicly holding banks. This study will take these questions as references and find how various factors of the ownership structure affect capital adequacy ratio of Taiwan banking.. 3. Data and Descriptive Statistics This empirical study uses ten independent variables, and everyone has 619. 政治大. observations. It collects unbalanced panel data from quarter 2, 2012 to quarter. 立. 4, 2017, six complete full years and investigates 27 domestic banks in Taiwan.. ‧ 國. 學. These samples come from listed companies, over-the-counter (OTC) and issuing. ‧. emerging stock companies, but exclude public companies and private entities. The data resources are from the public statistics information and the enforcement. y. Nat. er. io. sit. actions in the official website of Banking Bureau, Financial Supervisory Commission, R.O.C, and the database of Taiwan Economic Journal (TEJ).. al. n. v i n Cinh part 2, most ofUthem indicate that the financial By the literature review engchi. regulations, the situation of market competition and the ownership structure have a significant influence on banks’ risk-taking and even affect their capital adequacy ratios to fluctuate. If we also recall our memories from the formula of capital adequacy ratio, we can understand that fewer risks, higher the capital adequacy ratios increasing. For these reasons, this study applies three factors as core independent variables and presents the hypothesis that they would have a significant impact on the capital ratios. Besides, it also adopts some bankspecific variables, for instance, the lagged one-period capital adequacy ratios, 23. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(32) the fluctuation of banks’ loans, provision for bad debt and so on. The following chapter will present more detailed data descriptions, and Table 2 presents all the variables in the CAR model.. 3.1 Dependent Variable This research applies domestic banks’ capital adequacy ratios (CAR) in Taiwan to be the dependent variable. For the data integrity, this study must choose the extent of the research time from quarter 2, 2012 to quarter 4, 2017. 政治大 statistics, we can see the立 average value of banks’ capital adequacy ratios is close. although the complete quarterly data is from 2012 to 2017. From descriptive. ‧ 國. 學. to 12.72 %; besides, the minimum and maximum value are 8.27% 16.8% separately. Their standard deviation is almost 1.47, and this means that 619. ‧. observations have a small discrepancy. Figure 2 presents the fluctuating trend of. Nat. sit. y. capital adequacy ratios with time under the condition of fixed each bank (Figure. er. io. 2) and readers can get the information of samples in Appendix 2. Then, this study. n. a l about the independenti vvariables next. will present more introduction Ch. n U engchi. 3.2 Independent Variables 3.2.1 Key Variables i.. Financial Regulations What this study chooses to measure the pressure of the financial regulations. are the amounts of the monetary penalty and the frequencies of the non-monetary enforcement corrections. Although some literature used indices of financial 24. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(33) Table 2: Variable Description. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 25. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(34) Table 2: Variables Description. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 26. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(35) 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 2: The Trend of the Sample Banks’ Capital Adequacy Ratios 27. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(36) regulations from Banks Cope database, deposit insurance, restrictions of banks’ activities or other else, it would be hard to find any similar data in Taiwan. Thus, this study arranges penalties information issued publicly by the Financial Supervisory Commission, R.O.C to be the proxies of the pressure of the financial regulations. In the beginning, this study tries to fit these administrative data into quarterly ones. They are classified primarily into two categories: the amounts of the monetary penalty and the frequencies of the other enforcement action with. 政治大. non-monetary. Apart from the former, the other enforcement actions without. 立. using fine include correction, deadline amending and other punishments. It. ‧ 國. 學. means that the Financial Supervisory Commission, R.O.C ask banks to adjust. ‧. their actions of operation or enforce other non-monetary penalties on them.. Nat. sit. y. According to the descriptive statistics of Table 3, the frequency. er. io. distribution of monetary penalties in Figure 3, frequencies of fined and that of. n. al other enforcements with non-monetary judgments in Figure i v 4, we can observe n U e n gviolation c h i or inappropriate behaviors. the attitudes that regulators judge banks’. Ch. The 27 banks face 91 frequencies of the monetary penalties from quarter 2 2012 to quarter 4 2017, and these monetary penalties concentrate among 2 million to 5 million new Taiwan dollars. The most severe fines are just 12 million. During these periods, on the other hand, the summation of other non- monetary enforcement actions are 536 times. Banks face the most frequencies of the nonmonetary penalty per quarter are three times. The two situations express a substitute relationship: fewer the frequencies of the monetary penalty regulators 28. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(37) Table 3: Correlation Coefficients Matrix of Variables. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 29. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(38) Cumulated Frequencies (Times. 0. 100. 200. 300. 400. 500. Monetary Penalties. 0. 0.1. 0.5 1. 2. 3.4. 5. 8. 10. 11. 12. Fine (Million, NTD). 立. 政治大. y. sit. n. al. er. 400 0. io 0. 1. 2. v i n Frequencies of Fined (Times / per qu Ch engchi U. 200. Other Enforcement. 0. Cumulated Fre. ‧. ‧ 國. 學 Fined. Nat. Cumulated Fre. Figure 3: Frequency Distribution – Monetary Penalties. 0. 1. 2. 3. Frequencies of Non-Monetary Penalt. Figure 4: Frequencies of Fined and Other Enforcement 30. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(39) used, and more that of the non-monetary enforcement actions they took. Therefore, this research surmises that monetary penalties would have a positive effect on CAR, but the other enforcement actions without using fine might have a more significant influence on capital adequacy ratios than monetary penalties, but it is unsure about its impact on CAR being positive or negative owing to its high frequencies but light punishment.. ii. Competition in Banking. 政治大. Reviewing the previous theoretical and empirical literature, we can. 立. understand that researchers use different methods to examine the situation of. ‧ 國. 學. market competition, for example, they use CRK and HHI to estimate the concentration of the market, Lerner index to measure the market power, Boone. ‧. indicator to evaluate the level of competition and so on. Besides, from the view. Nat. sit. y. of concentration and profitability and basing on Cournot’s competition model,. er. io. we can derive the replacing relationship between Lerner index and HHI (Pepall. n. v higher market power et al., 2008). The two indexahave l a positive relationship ithat n U engchi companions with higher market concentration.. Ch. Nevertheless, these literature use them to estimate the level of banks’ competition in loans, deposits, and so on with variables of the country level. This study only adopts one industry, one country and get one value, so it is not feasible to use CRK and HHI. Apart from this, because of data collecting and some difficulties in defining the price and marginal cost of banks’ loans, deposits, services or the other products, this study applies return of assets (ROA, after tax and ex-dividends) to represent the condition of banks’ competition. ROA is the 31. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(40) ratio of the net profits to average total assets. It means how a bank uses its assets efficiently and generates responding profits. This concept contains revenue either from the bank’s business or other operation; thus, it can represent a bank’s managerial ability and be a better proxy of competition level. 5 Furthermore, according to Pepall et al. (2008) and extending the derivation of the Lerner index and HHI, we can also get the relationship among ROA, Lerner index, and HHI. Higher ROA represents higher market power and market concentration.. In the light of the variables’ statistic description, sample banks’ ROA are. 治政大 they have a standard among -0.310 and 2.310 and their mean are 4.62. Besides, 立 deviation of 0.342. Although previous studies present different viewpoints about ‧ 國. 學. how the level of market competition affects capital adequacy ratios, one of the. sit. y. Nat. to CAR.. ‧. hypotheses in this study is that higher market power will induce a positive effect. io. er. iii. Ownership structure. n. a. v. i l Creview in part 2.3, nresearches Base on this literature indicated that. hengchi U. depending on different condition, the ownership structure and the capital adequacy ratio or risks have a significant but different relationship. This study adopts equity data to examine the influence on banking in Taiwan from TEJ database. In the beginning, the proportion of the majority shareholder holdings (MS), the percentage of the cash flow claim (CFC) and the ratio of directors & supervisors' shareholding (DSS) composed the ownership structure in this study. 5. Why does not this study apply banks’ market shares to represent their competition situation? For example, a bank having higher market shares might owe to that it adopts lower loan interest rate to promote higher market shares of loan, but this strategy might cause their profits to decline in the long term. Hence, this study choose to uses ROA after judging. 32. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(41) It supposed that the percentage of the major shareholders, supervisors or the cash flow claim of ultimate controllers would induce banks to change their attitude about risk and cause an impact on banks’ capital adequacy ratios.. In the official definition of Taiwan, the percentage of the major shareholders (MS) means an entity or a person holding more than 10% of a company's outstanding shares and they have not ever been directors or supervisors. The percentage of cash flow claim (CFC) means the ultimate. 政治大 the shares that directors and 立. controllers’ 6 right to share profit. The percentage of directors & supervisors' supervisors own in a. 學. company.. ‧ 國. shareholding (DSS) is. ‧. After testing the correlation of the variables, this study found that the percentage of the major shareholders (MS) and the percentage of directors &. y. Nat. er. io. sit. supervisors' shareholding (DSS) has a high negative correlation (-0.88) 7 . It will generate a biased outcome if both of them are used to predict the impact on. al. n. v i n Ch simultaneously, i.e., the collinear engchi U. capital adequacy ratios. or multi-collinear. phenomenon happened in the regression equation. Thus, this article adopts the percentage of the major shareholders (MS) and the percentage of cash flow claim (CFC) in the CAR model.. 6. The ultimate controller are the people having the greatest or final influence on the decision making or the distribution of resources in an industry, and they are usually the most major shareholder, president of the board or a managing director, etc. and their family or their management team. 7 Maybe the negative relationship is because two reason. First, foreign investment institutions keep more equities that eliminates directors & supervisors’ shareholdings, but these foreign investors do not intervene banks’ management and operation, and they just trade these shares in the stock market. Second, it would be possible that directors, supervisors and major shareholdings compete the control right. The situation exists in some banks of Taiwan. 33. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(42) We also understand the situation of MS and CFC from variables’ descriptive statistics. The average values of MS and CFC are 12.880 % and 22.607 % individually. The percentage of the major shareholders and cash flow claim are 0% in some banks. What kinds of effects do the two variables lead on CAR? This study hypothesizes that a higher percentage of the major shareholders causes lower CAR because the major shareholders might expect banks to use capitals efficiently and create more profits than increasing them just for safe preparation. Besides, the percentage of cash flow claim means the ultimate. 政治大 presented a theory of path立 dependence and mentioned that in control chain,. controller's rights to join companies’ surplus distribution. Bebchuk et al. (1999). ‧ 國. 學. controllers might tend to hinder any changes that would increase the efficiency of a company because those variations would harm to their private controlling. ‧. benefits under the existing structures. Therefore, the ultimate controllers having. Nat. er. io. sit. y. higher the cash flow claims might cause a negative effect on CAR.. 3.2.2 Other Variablesa. n. iv l C n hengchi U The Bank’s Innovation. i.. Since the 1960s, the financial market has experienced the process of innovations (Miller, 1986) and this situation has been continuing until now. From financial derivatives to financial technology developing, banks create higher profits and reduce more trading cost than before. Banks in Taiwan turn over a new leaf about Financial technology (FinTech) in recent year, and they will face the risk different from the traditional condition. In the past, banks can always achieve the regulations of CAR, but they would meet more challenges than 34. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(43) before. We can investigate this issue from two dimensions. The first part is that the innovation of financial products will help banks to disperse risk (Turley, 2012) and this might affect CAR positively. Second, the development of FinTech (for example, self-service banking, cashless payments and so on ) might need to input more resources to explore that might cause banks no longer keep more capitals in the defensive reason, and this will cause CAR a negative influence. This study uses the intangible asset (IntAss) as a proximate variable of financial innovation to discuss how this factor will affect the CAR. Because. 治政 financial derivatives trading belongs to the off-balance 大sheet items, it is different 立 from the intangible assets. The intangible asset can represent some characters of ‧ 國. 學. the innovation such as FinTech so that it could have a negative influence on the. ‧. CAR. Another reason to opt for the intangible asset is that it would not be easy. sit. y. Nat. to obtain complete banks’ innovations and development data in Taiwan. If. io. er. researchers can get similar information, they can investigate this issue in advance in the future. Table 4 provides more information about sample banks’. n. al. Ch intangible assets. These observations about. engchi. iv n the U innovation. have a more. substantial standard deviation, and the mean equals to NT $1,585.237 million, the value of minimum is NT $0 million, and the maximum is NT $12,329.224 million.. ii. Bank-specific variables Alongside this those variables mentioned above, the other variables about banks’ business might also affect CAR. Take the reference of previous empirical literature, and this study collects some bank-specific data from TEJ database. 35. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(44) This part contains the lagged one-period capital adequacy ratios (Lag_CAR), the provision for bad debt expenses minus financial costs (PBDE.FC), the fluctuation of due from the central bank (d_DCB) and that of the bills negotiated discounted and loans (d_BNDnL).. Here, provision for bad debt expenses minus financial costs (PBDE.FC) is the allowance for bad debts deducts the financial business cost and reflect bad debts preparation suitably. Due from the central bank (DCB) means banks’ funds. 政治大 withdrawal and deposit of cash, settlement of current funds, a certain percentage 立. in the Central Bank. Those are used to pay for liquidation, transfer appropriation,. ‧ 國. 學. of deposits put in the Central Bank and other regulatory deposits. Bills negotiated discounted and loans (BNDnL) includes a summation of secured and. ‧. unsecured loans, loans of credit cooperative and farmers’ & fishermen’s. sit. y. Nat. associations, bills negotiated and discounted deducts gross overdue loans. er. io. (discounts and loans subtract an allowance for bad debts).. al. n. v i n C hbanks’ asset sizeUand the item of deposits & At the start, this study took engchi remittances abstracting and deposits from mutual loan accounts (DRAnDML) into consideration. However, banks’ assets encompass loan items, and deposits & remittances abstracting and deposits from mutual loan accounts (DRAnDML) and bills negotiated discounted and loans (BNDnL) also have a high level of correlation for 0.99, and they might have a collinear situation, too. Therefore, this study finally took capital adequacy ratios in lagged one period (Lag_CAR), provision for bad debt expenses minus financial costs (PBDE.FC), the fluctuation of due from the central bank (d_DCB) and that of bills negotiated 36. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(45) discounted and loans (d_BNDnL) into account in the CAR equation.. No matter capital or asset, it is not easy to change dramatically for banks during one quarter in an ordinary situation, and prior capital adequacy ratios might have an impact on current ones. In this study, it assumes that capital adequacy ratios in lagged one period (Lag_CAR) might have a positive influence on the current period t. According to the identification of Tier 2 in the Basel Accord 8 , increasing provision for bad debt expenses minus financial costs. 政治大 fluctuation of due from the central bank (d_DCB) might bring what kinds of 立. (PBDE.FC) would cause the CAR to rise. Besides, it would be uncertain that the. ‧ 國. 學. influence to CAR because it encompasses reserve requirements (it might be positive to CAR) and some short-term settlement (it might have a negative. ‧. impact on CAR). Additionally, based on the literature of Rime (2001), banks’. sit. y. Nat. assets (size) have a negative relationship with CAR, and loans categorized under. er. io. banks’ assets. Thus, it would be possible that the fluctuation of bills negotiated. n. a discounted and loans (d_BNDnL) might cause a negativev influence to CAR. i l C n hengchi U. This study collects the original data of all eleven variables in the CAR model from quarter 1 2012 to quarter 4 2017, and to coincide with Lag_CAR; it chooses the range of time from quarter 2, 2012 to quarter 4, 2017 finally. Readers can get more information on bank-specific variables from the variables’ statistic description and Table 4, and this study will present the CAR model and the methodology in the next section.. 8. Regulatory capital equals to the summation of Tier 1 and Tier 2. Tier 2 capital contained loan loss reserve, subordinated debt, and so on. 37. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(46) Table 4: Descriptive Statistics. 立. 政治大. ‧. ‧ 國. 學 er. io. sit. y. Nat. n. 4. Empirical Model a l and Methodology v i n Ch engchi U. The study sets a panel regression model and applies the least squares. dummy variables model 9 (LSDV) to obtain estimation from it. The basic model can present as follows: 𝑦𝑦𝑗𝑗𝑗𝑗 = ѡ𝑥𝑥𝑗𝑗𝑗𝑗 + 𝛿𝛿𝑗𝑗 + µ𝑗𝑗𝑗𝑗 In the equation, yjt expresses as the dependent variable, and xjt indicates the independent variable where j symbolizes each of the cross-section unit and j 9. The fixed or within effect also represent the least squares dummy variables model (LSDV.) 38. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(47) from 1 to n; t means time, and it is from 1 to T. To shape the heterogeneity of individual cross-section unit, the unobserved effects model has a usual assumption: the error term has two respective elements. One of them denoted by 𝛿𝛿𝑗𝑗 does not alter with time and is particular to every unit. On the other hand, 𝜇𝜇𝑗𝑗𝑗𝑗 is independent and identically distributed and does not have an impact to 𝑥𝑥𝑗𝑗𝑡𝑡 and 𝛿𝛿𝑗𝑗 .. Besides, the least squares dummy variables model has a fundamental assumption: common slope exists, and individual unit (cross-section) owns the. 治政 interceptions separately. These individual interceptions 大 have the possibility of 立 correlation with 𝑥𝑥 . According to these concepts, my study tests the effect of ‧ 國. 學. 𝑗𝑗𝑗𝑗. banks’ unobserved variables on the CAR panel regression model. In this segment,. ‧. unobserved banks’ variables present a significant influence on the CAR that. sit. y. Nat. means each bank’s characters that do not adopt in the model still have an impact. io. a. er. on CAR (see Table 5).. n. The original panel model l without considering thei vendogenous situation is. n U i e n model g c h employs the method I. Then, the proposed CAR a two-stage method to. Ch. exam the main topic of this study. In the first stage, the study considers the endogenous variables, return on assets (ROA), the amounts of the monetary penalty (MP) and the percentage of the majority shareholder holdings (MS), with � , three separate equations, and they generate three new parameters, 𝑀𝑀𝑀𝑀. � 𝑎𝑎𝑎𝑎𝑎𝑎 𝑀𝑀𝑀𝑀 � . The CAR model using them in the second stage is the method III. 𝑅𝑅𝑅𝑅𝑅𝑅. Furthermore, the study considers the heteroscedasticity of the standard error in the CAR model; afterward, it tries to correct this problem. The method II and 39. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(48) Table 5: Unobserved Banks’ Variables Summary. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 40. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.

(49) Table 5: Unobserved Banks’ Variables Summary. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 41. DOI:10.6814/THE.NCCU.MEPA.051.2018.F09.