Does Bank Liquidity Matter in the Loan Supervision Effect of Bank Capital Adequacy Ratio?

Abstract

The requirement of bank’s capital adequacy ratio did not prevent the occurrence of financial risk, and then the requirement of bank’s liquidity came into view. Then, the impact of bank capital and liquidity on bank loan changes is a real problem faced by regulators and banks themselves. In this context, we study whether the impact of capital adequacy ratio on loan changes is related with the bank’s liquid asset ratio by constructing theoretical model and empirical analysis method. Our study first shows that the impact of bank’s capital adequacy ratio on loan changes is related with liquid asset ratio. We find that off-balance sheet loan commitments offset the parts impact of liquid asset ratio and capital adequacy ratio on loan changes, and small and medium-sized banks are less affected by liquid asset ratio. Under the condition that banks hold certain liquid assets, bank’s liquid asset ratio is positive with the influence of the capital adequacy ratio on loan changes. Finally, we put forward suggestions from the perspective of bank risk management and bank capital and liquidity supervision.