| dc.description.abstract | Leverage ratio of the banking industry is much higher than that of other industries. At the end of 2021, the average ratio of net worth to total assets of domestic banks is only 7.13%. Therefore, it is important that banks possess sufficient equity of their own to protect themselves from unforeseen circumstances. Nowadays, supervision parties around the world employ “capital adequacy ratio” for monitoring the equity sufficiency of the banking industry. Based on the specification of “risk weights” for different assets, the supervisory authority therefore requires financial institutions to acquire sufficient self-owned capital so as to fulfill the designated capital adequacy ratio.
The first research question for study is how risk-weighted assets (RWA) are related to various business operations of banks. Secondly, I also discuss how a regulatory change affects that relation. Specifically, this study aims to find the impact from, for example, the two cases where the Financial Supervisory Commission (FSC) in Taiwan adjusted the assigned risk weights in 2017 and 2020, respectively, as the regulatory changes alter the calculation of bank′s RWA.
This research uses the Ordinary Least Squares (OLS) to conduct multiple regression analysis on the panel data drawn from the domestic branches of the Bank T from 2014 to 2021, after excluding branches with special purposes. I obtain 6 main results: (i) Both personal and corporate loans have significant positive impact on RWA. (ii) Both NT dollar and foreign currency demand deposits exhibit significant negative impact on RWA. (iii) The Non-Performing Loans (NPL) ratio of previous year has a significant negative impact on RWA, implying higher (lower) NPL ratio in previous year reduce (enhance) the willingness for bank branches to undertake RWA. (iv) Profits have positive impact on RWA. (v) Risk weights have significant positive impacts on RWA. (vi) When FSC adjusts risk weights, it directly affects the bank′s establishment of RWA, while indirectly affects the bank’s size of credit business.
This study also finds that current capital adequacy ratios of “Domestic Systemically Important Banks” (D-SIBs) are in general higher than 14.5%, which is required in 2025 by the FSC. Combining this fact and the empirical results drawn from this study, I provide the following strategic suggestions. First, Bank T may moderately increase RWA since is still complying with regulatory requirements on capital adequacy, as this can achieve higher capital efficiency. Secondly, for achieving the same amount of RWA, Bank T may increase its credit business with clients whose loans are classified with lower risk weights, while still require these clients to provide colleterial such as demand deposits so as to balance out the possible higher risk coming with more credit business. Finally, Bank T may strengthen the credit requirement and thus reduce the NPL ratio, and thus increase the establishment of RWA as well as potential profits for the bank. | en_US |