The Study Of The Impact Of Capital Regulation In China’s Endogenous Monetary System On Credit

In China, the currency issue mechanism is the prerequisite of making monetary policy work. Thecurrency issue mechanism makes the money circulation system being an open one. The requiredreserve ratio fails to constraint to the scale of credit in this opening money circulation system. Thisfact brings the challenge to the monetary policy. As the regulatory requirements, the capital adequacyratio also is attached great importance to the commercial banking system. Because of the risk natureof loans, commercial banks usually use the capital adequacy ratio to restrict the scale of loans. Thecontrolled interest rates and market-oriented interest rates constitute the interest rates system in China.In this study, the author proposes the conception of capital adequacy coefficient and then afurther conclusion is that the capital adequacy ratio has an effect on the loan scale through the capitaladequacy coefficient under the existing monetary system in China. The central bank can affect thecapital adequacy coefficient by regulating the yield rate of central bank notes. And then the centralbank can impact the scale of loan. In this paper, a quantitative relationship between the capitaladequacy ratio and the interest rate system through the expected rate of return of bank capital isestablished to examine to the relation between them.Chapter1gives the research questions. Literatures review is made in chapter2and researchquestions are further refined and specified.Chapter3proposes a framework to explain the causes of endogenous money. Under theendogenous money condition, a model is established to examine the relationship between marginalloan and factors which have an effect on it. Among these factors, required reserve ratio is the mostimportant one. Based on the conclusion, further research is made to explore the causes andmechanism which lead to the failure of required reserve ratio.Chapter4develops the conception of capital adequacy coefficient and points out that the capitaladequacy ratio regulation system will work under the capital adequacy coefficient. Regulationauthorities have regulated commercial banks under the capital adequacy ratio framework. Because ofthe risk nature of loan, the capital adequacy coefficient plays a more important role in the control ofloan scale.Chapter5focuses on the relationship between the capital adequacy coefficient and the interest rate system. Both controlled interest rates and market-oriented interest rates exist in the financialsystem. Among the interest rates, the yield rate on central bank notes is the bench mark of otherinterest rates. The expected return rate of bank capital reflects the relationship of risk and return. Theauthor argues that risk should be covered by bank capital and the return should be the combination ofcontrolled and market-oriented interest rate. So the relationship between the capital adequacycoefficient and interest rates system exist. A model is developed to display this relationship in thispaper. And, based the model, the relationship between the bench mark interest rate and the capitaladequacy coefficient is examined.And chapter6lists main conclusions and policy recommendations.The main contributions of this paper are：(1) Put forward to the conception of endogenousmoney base.(2) Demonstrate that it is capital adequacy coefficient not capital adequacy ratio that giveconstraints on scale of loan.(3) From the perspective of expected return rate of bank capital, thispaper put forward to a model to examine the relationship between the capital adequacy coefficient andinterest rate system.