The Study On The Cyclical Behaviors Of China’s Commercial Banks Under Capital Regulation

The global financial crisis hit the banking system and the real economy, which has resulted in rethinking about economic and financial theory, and brought profound changes in the field of financial regulation. The lack and weakness of financial regulation are considered to be the reason why the global financial crisis began, spread, and finally led the global economic into downturn. Since2009, many international organizations and national governments have announced a series of research reports and financial regulatory reform programs. Through them we can find that it has become a main trend of the global financial regulation in the future to strengthen macroprudential regulation and integrate it with microprudential regulation. The new concept of macroprudential regulation has been reflected in Basel III about bank regulation, published lately. Two new countercyclical policy instruments, capital conservation buffer and countercyclical capital buffer, have been created in Basel III. Through them, the regulatory authorities attempt to urge commercial banks to maintain certain capital buffers in good times, in order to absorb losses during economic downturns. At the same time, they try to restrict the excessive volatility of bank credit through the tools, which may help slow down the inherent procyclicality of capital regulation and the banking system. However, bank capital buffers themselves may also have cyclicality, which can affect the cyclical behavior of banks. Therefore, for improving the effectiveness of bank capital regulation in China, strengthening the positive effect brought by the countercyclical regulatory tools, maintaining sound operation of bank sectors and economic and financial stability in China, it is necessary to understand clearly the behavioral characteristics of the regulatory objects. In view of this, this paper investigates some relative problems about the cyclical behaviors of commercial banks in China under capital regulation from the relatively new perspective of bank capital buffers, with the methods of theoretical analysis and empirical research. Then we raise corresponding policy recommendations based on our conclusions and China’s reality.Firstly, based on yearly data of87commercial banks in China, we preliminarily explore the cyclical nature and its economic effects of China’s bank capital buffer. The empirical results show that:in the sample period, capital buffers built by China’s commercial banks on the whole have no cyclicality. It is noteworthy that the implicit assumption already existed in the analysis of cyclicality of capital buffers may be ambiguously applicable to China, that is to say, increasing capital buffer levels may not necessarily lead to a reduction in bank credit supply. However, the negative relationship between capital buffers and bank credit supply is the key to judge whether capital buffer can be used to adjust the supply of credit, which is the fundamental point of determining the cyclicality of capital buffers through the correlation of capital buffers and business cycle. We also found that capital buffers of different types of banks have differentiated cyclical characteristics, especially for large banks’ capital buffers which showed significant countercyclical characteristics, that is to say, the correlation between capital buffers and economic growth ratio is positive, and then there is a negative correlation between capital buffers and bank credit. From that we can draw a conclusion that to some extent, large banks’capital buffers can alleviate the cyclical economic fluctuation through the binding effect on excessive volatility of credit supply.Secondly, based on quarterly data about China’ listed banks during the period from the first quarter of2005to the fourth quarter of2011, which have been divided into different business cycle stage, the paper do some further research about the impact of economic cycle on bank capital buffers in China. The study finds that in the sample period, no matter in the period of economic expansion or recession, capital buffers of China’s listed banks are as a whole countercyclical. Moreover, the sensitivity of capital buffer to business cycle is asymmetry, which means that capital buffer is more strongly affected by economic fluctuations during the recession. In respect of the cyclical driving source, the changes in capital are also important momentum for countercyclicality of capital buffers, the changes of bank credit, one of the risk-weighted assets, are as well as used to adjust bank capital buffers. The studies based on different types of banks show that, large banks keep countercyclical capital buffers. The main driving factor of them is the cyclical adjustment of capital, and there is only weak evidence to suggest that large banks will positively adjust loans to change the level of capital buffers. The other listed banks tend to make their capital buffers exhibit countercyclical during the recession by adjusting their loan. Finally, the research based on banks with different levels of capital adequacy shows that the difference from capital adequacy levels of listed banks does not result in significant difference in cyclical behavior of capital buffers, so that the conclusion that capital buffers are countercyclical is still valid. But low-capitalized banks are not forward-looking. When facing regulatory pressure, they may not build up their capital buffers during booms to be able to accommodate materializing credit risk during busts, and thus are more likely to suffer from the adverse impact of economic recession.Finally, the Basel Committee has issued’Guidance for national authorities operating the countercyclical capital buffer’, which require national regulatory authorities in different countries to carry out the guidance about countercyclical capital buffer. Based on the recommendations of its framework, we do some empirical works towards related issues about how countercyclical capital buffer policy will be applied in China’s banking industry. The results suggest that in China, the credit-to-GDP ratio can be used as an indicator of excessive growth of credit and accumulation of systemic risk. It is to some extent reliable when used usually as a reference for China’s bank sectors to withdraw countercyclical capital buffer. However, the indicator is still paid more attention since sometimes it may produce a misleading signal. Therefore, we suggest that China’s banking regulatory authorities should remain vigilant, not only focus on this indicator, but make further analysis towards economic and financial situations and volatility of credit in the banking system as well. By combining self-judgment and using the indicator as reference, they can make more accurate decisions on countercyclical capital buffer.