Banks’ Capital Structure and the Liquid Asset – Policy Implication of Taiwan

Banks’ size, liquidity and profitability are the main determinants of their capital ratios in Taiwan. Large banks implicitly substitute bank capital for regulator’s capital and banks mainly depend on internal cash flows for capitalization. However, medium‐sized banks in Taiwan use liquidity as a substitute for bank capital, and small banks with low liquidity tend to have lower capital ratios. Regulators should pay close attention to these banks since they may be undercapitalized.