The impact of regulatory changes on banks' risks and returns in Taiwan

The purpose of this paper is mainly to review the existing substitute relationship between capital regulation and deposit insurance system in Taiwan. We conclude a converse relationship exists between variable deposit insurance system and risk-based capital regulation, decrease of one can substitute for increase of another. After examining the impact of regulatory changes on banks' returns and risks during the period 1985 to 2000 in Taiwan, we find out that reducing fixed insurance rate and adopting risk-based capital regulation, the improvement on banks' return to risk ratio is significant. However, it is not significant following the implementation of variable-rate system.