Analysis of capital regulation effectiveness for Chinese commercial banks based on simultaneous equation models

Bank capital serves as the foundation for banking operations and plays a critical role in maintaining daily operations, enhancing the banks public image, and facilitating expansion and development. At present, banking regulatory authorities in both China and abroad enforce strict oversight of banks capital adequacy ratios, contributing to relatively stable capital conditions. This paper conducts both data analysis and empirical analysis to evaluate the capital regulation status and its feedback effects for Chinas four major state-owned banks and other small and medium-sized commercial banks. The data analysis reveals that the capital structures of the four major state-owned banks exhibit high levels of security. Furthermore, drawing on the simultaneous equations model proposed by Shrieves and Dahl in 1992, the study finds that the regulatory pressure faced by small and medium-sized commercial banks promotes safer capital structures and risk levels. However, as regulatory pressure increases, the speed of adjustment tends to decline. Based on these findings, the paper puts forward several recommendations for improving capital regulation in Chinese banks: (1) establish a multi-layered regulatory system to avoid blind spots in supervision; (2) encourage the banking sector to transform its profit model to eliminate risk at the source; (3) ensure that capital regulation policies are coordinated with monetary policy to prevent offsetting policy effects; and (4) enhance communication between regulatory authorities and commercial banks during the implementation process to avoid inefficiencies in adjustment.