Determinants of the Capital Level of Banks in Hong Kong

Yip Wong, Ka-fai Choi and Tom Fong ()
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Yip Wong: Research Department, Hong Kong Monetary Authority
Ka-fai Choi: Research Department, Hong Kong Monetary Authority

No 513, Working Papers from Hong Kong Monetary Authority

Abstract: Banks in Hong Kong generally maintain capital adequacy ratios well above the regulatory requirement. The buffers are largely determined by the internal considerations of the banks, their responses to market discipline, and the regulatory framework. Despite the presence of excess capital, banks still respond to changes in capital requirements, and the buffer will only partially absorb a change in the regulatory requirement. The minimum capital requirement, therefore, remains an effective policy instrument. To the extent that part of the high capital buffer is due to the agency problem, information asymmetries, or a mismatch between the expectation of the regulator and banks over the approach to maintaining a capital buffer to prevent a breach of capital requirements, action could be taken to improve the use of capital. In this connection, the initiative under Basel II is expected to help address some of these issues. Our analysis also confirms that banks tend to hold a higher CAR in economic downturns, but a lower capital ratio in upturns. The implications of such a procyclical nature of the capital ratio on the economy, and how it may be affected by the forthcoming changes in the more risk-sensitive approach under Basel II, are worth exploring.

Pages: 33 pages
Date: 2005-09
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Citations: View citations in EconPapers (9)

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Related works:
Chapter: Determinants of the Capital Level of Banks in Hong Kong (2008)
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