Insufficient capital in small and medium-sized banks (SMBs) constitutes a central challenge to financial system stability, raising the critical question of whether regulatory authorities can effectively guide capital replenishment in problem banks through enhanced supervisory attention. Using supervisory rating data from 126 regional SMBs in a Chinese province, this paper systematically examines the mechanisms through which supervisory attention affects capital replenishment behavior among problem banks. The analysis proceeds along multiple dimensions, including baseline effects, capital structure hierarchy, threshold conditions, replenishment pathways, and post-replenishment outcomes.

The findings can be summarized as follows: First, regulatory constraints play a dominant role in shaping the behavior of problem banks: When facing heightened supervisory attention, banks tend to adopt compliant strategies such as capital replenishment rather than risk-shifting. However, this regulatory effect weakens significantly once banks deteriorate into severe distress. Second, problem banks exhibit a clear preference for replenishing core Tier 1 capital over other capital layers, reflecting a structured and quality-oriented capital adjustment strategy. Third, capital replenishment pathways are highly heterogeneous. Internal capital accumulation is strongly dependent on profitability, capital market channels are largely ineffective, and local government fiscal capacity and regional industrial diversification emerge as key supporting factors. Fourth, the effects of capital replenishment are asymmetric, and only large-scale replenishment significantly improves supervisory ratings.

This paper clarifies the effectiveness boundary and transmission mechanism of regulatory constraint mechanisms, systematically reveals the multiple pathways and practical limitations of problem banks’ capital replenishment, and as the asymmetric characteristics of capital replenishment effects. Based on the findings, it proposes targeted policy recommendations: Improve the tiered regulatory rating mechanism and strengthen the weight of core Tier 1 capital in assessments, while establishing a mandatory exit mechanism for persistent problem banks; enhance banks’ internal capital accumulation capacity through business structure optimization and tax incentives; simplify the approval process for capital instruments and lower market financing thresholds for SMBs; establish a tripartite coordination mechanism linking fiscal authorities, regulators, and industries for regional financial stability, forming a concerted force to address systemic risks in SMBs.