The Issues Of Pro-Cyclicality In Banking System And Counter-Cyclical Regulatory Policy

Caused by the subprime mortgage crisis, the2007-2009turmoil in financialmarkets was seen as the worst financial crisis since the Great Depression. The sameas the previous financial crisis, It had also gone through a long economic boombefore the financial crisis, the same excess liquidity in the financial system, assetprice bubbles, the leverage ratio increasing, the rapid growth of credit, in the processsystemic risk is accumulating, but the level of risk is generally underestimated by themarket and the regulatory authorities.After comprehensive reflection of the financial crisis, it is generally consideredthat the probability of economic and financial crisis in the world due to high inflationhas fallen significantly, but only keeping inflation low and stable macroeconomicstill not enough to protect the financial stability; and due to the neglect of themacro-systemic risk concerns, the traditional micro-prudential supervision conceptto ensure stable operation of the financial system must be strengthenedmacro-prudential supervision to guard against systemic risk.In other words, peggedto inflation-based monetary policy and supervision of the capital as the core ofmicro-prudential supervision is not sufficient to ensure the health and stability offinancial decency. It is based on the above understanding, the internationalcommunity agreed that an effective macro-prudential regulatory framework shouldbe established, which will become a common trend of the world’s financialregulatory reform.China’s12th Five-Year plan also officially presented the" counter-cyclicalmacro-prudential institutional framework.”Compared with the previous two planning,although "Financial reform" text does not changes, efforts have greatly changed.,Inthe proposal, the reform of the financial system to build counter-cyclical financialmacro-prudential management system framework.is becoming the most importantthing.the fundamental objective of macroprudential management is to preventsystemic risk, the financial industry as an organic whole, not only prevent theinterrelated within the financial industry could lead to the risk of transmission, butalso concerned about the soundness of the financial system across the economic cycle, which effectively manage the entire financial system risks, and ultimately thegoal of maintaining financial stability.Held in October2010, the "macro-prudential policy: An Asian PerspectiveSenior Seminar, the People’s Bank of China Governor Zhou Xiaochuan said:" one ofthe major lessons of the international financial crisis, is not only concerned about therisk of a single financial institution or a single industry.prevention, we must alsoguard against financial risks from a systemic point of view, while themacro-prudential policy is good medicine for systemic risk."Macro-prudential supervision has two dimensions: one is the time dimension,the main focus is the interaction between the financial system and real economy overtime, the main problem of this dimension is how to ease the financial system’sprocyclical problem. Another dimension is cross-industry’s dimension, the mainconcern is the linkages between the various financial institutions at the same point intime, as well as holders of common risk exposure. This dissertation study from thefirst dimension, that is, analysis of the procyclicality of the financial system, and canuse the countercyclical policy tools.Procyclicality of the banking sector is mainly caused by three reasons, first isthe financial markets’ imperfections, especially credit market, and the limitedrationality of market participants, this financial system of the endogenouspro-cyclical cannot be eliminated; the second reason is caused by internal factors offinancial institutions, such as risk measurement methods and models using a shortspan of time, incentives and financial institutions to encourage the pursuit ofshort-term interest in the development of strategy, the risk management models andexposure convergence;the third reason are the external rules and policies, forexample, capital regulation, loan loss provisions fair value and so on..Then, we use a theoretical model to analyze the various countercyclicalmonitoring tools on the impact of the financial system’s moral hazard. Compare thepros and cons of various capital monitoring tools from the perspective of moralhazard, pointed out that the countercyclical policy tool can take into account the "toobig to fail" moral hazard problem caused by the financial institutions, the article onthis issue a preliminary exploration. Under conditions of full information, the capital adequacy ratio of the time variable can not be a good solution to the problem ofmoral hazard facing by "too big to fail" financial institutions; contingent capital canbe a partial solution to the financial institutions’ moral hazard problem;"bailout"insurance fund can be a good solution to the problem of moral hazard.Response to the crisis, Basel (III) propose the countercyclical capital buffer ofthe regulatory program, which aims to build a capital buffer to prepare to use ineconomic recession. when the economy is prosperous, it will inhibit the excessivegrowth of credit, the negative impact of procyclicality by deleveraging in theeconomic recession will be reduced. Also it can increase the recovery of the bankingsector. Also we believe that the countercyclical capital buffers buffer’s exist canbring these positive effects, there is a negative effect of the banking sector, it mayinduce herding, an increase of the correlation between the different banks’holdingassets, thus increasing the systemic risk of the banking sector, we also use atheoretical model, a detailed analysis of this negative effect.Chapter VI, we study three questions. The first is the actual situation of China’sbanking sector procyclical an empirical test. The results show that China’s bankingsystem has pro-cyclical, but for various reasons (such as government intervention,the model data for time period too short, we are at the stage of the reform ofstate-owned banks, government policy changes, etc.) the periodicity is notsignificant. The second summarizes, the inverse-cyclical policy China has taken afterthe financial crisis. The third is the difficulties and obstacles.faced by Implementingthe counter-cyclical regulatoryFinally, we do a full text summary. I summarizes the main conclusions of thispaper and subsequent research prospects.