Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 06, 2020 erstellt
Beschreibung:
We develop a portfolio-choice model to investigate the relationship between firm's capital adequacy and risk-taking under a risk-based (or non-risk-based) capital regulation and examine how a regulatory reform influences this relationship. The model predicts that either all financial institutions reduce their risk-taking, or there exists a capital-adequacy threshold below which risk-taking increases as regulation becomes stricter. The Chinese solvency regulatory reform in the insurance sector provides a unique natural experiment to test our theory. In 2015, each insurer in the Chinese market was required to report its solvency ratios under both the original and the new regulatory systems. The difference between the two solvency ratios produces an exogenous and insurer-specific measure of the change in regulatory pressure that occurred due to the reform. Consistent with our theoretical predictions, we find that increasing regulatory pressure induces greater risk-taking for less capital-adequate insurers, an unintended and adverse impact of the regulatory reform. We show that increasing the penalties of insolvency, increasing the risk sensitivity of capital requirements, and reinforcing the qualitative risk assessment are effective policy remedies for this backfiring problem