This dissertation, under the mean-variance framework, firstly
utilizes the utility-maximization model and value-maximization
model to examine the impact of the risk-based capital
regulation on bank portfolio and its bankruptcy risk to
evaluate the effectiveness of the new plan. We adopt the
''market-based'''' approach suggested by Rochet (1992) to drive the
optimal risk weights and demonstrate that the new plan is a
mixed scheme of asset restriction and the capital adequacy
requirement. In spite of the fact that the incentive for a bank
to increase asset risk declines as the correlation between
asset risks and risk weights increase, only if the risk weights
are proportional to the systematic risks (or excess returns)in
the sense that they are ''market-based'''' can the new plan redress
the bank''''s bias toward riskier assets and effectively reduce
the bankruptcy risk to the desired level. Otherwise, it may
cause a similar ''moral hazard'''' problem, as does the uniform
capital ratio regulation, and fail to achieve the solvency
goal. Furthermore, the empirical investigation is carried out
by using data on 23 domestic banks from 1985 to 1993. We design
a two phase hypothesis-testing including: (1) Portfolio
Reshuffling Hypothesis and (2) Bankruptcy Risk Hypothesis to
examine how the banks respond to the new Act in Taiwan. The
empirical results suggest the banks did respond to the new
capital regulation by reshuffling their portfolios. As expected
theoretically, the risk -based capital ratios of the binding
banks significantly increased while those of the unbinding
banks declined. More importantly, the banks tended to raise
their capital levels or lessen their asset growth in response
to the promulgation of the new Act rather than reshuffle their
asset portfolios toward less risky assets, and which resulted
in a decline in the sample bank''''s bankruptcy risk.