A Study On The Impact Of Capital Regulation And Monetary Policy To Bank Risk-taking

Before the financial crisis in 2008,the capital regulation based on "Basel Ⅱ"ignored the bank pro-cyclical behavior,which raised the bank risk-taking level in the low interest rates monetary policy environment and then led to the financial crisis began in bank subprime mortgage crisis.After the crisis,capital regulation,monetary policy and bank risk-taking exploration and empirical tests became academic focuses.Research conclutions show that monetary policy impact on bank risk-taking by changing the bank income and asset valuation judgment、improving bank profit motivation,and the forecasting ability of bank for the future monetary policy,as well as "too big to fail" moral hazard.The research conculsions formed the "income and the valuation effection","profit effection","policy expected effection" and "mindset and insurance effection" opinions,and improved the relevant measures of bank capital regulation based on the research conclusion and regulatory practices which formed the basic framework of the current "Basel Ⅲ".But there is a lack of depth research about the theory mechanism of capital regulation and monetary policy affect bank risk-taking,the bank risk-taking adjustment and the consequences under the double constraints of capital regulation and monetary policy.In this view,this paper firstly defined the "bank risk-taking" scientifically on the basis of existing research,secondly studied the theory mechanism of capital regulation and monetary policy affect bank risk-taking based on the perspective of "income and the valuation effection","profit effection","policy expected effection" and "mindset and insurance effection".Thirdly,analysised the impact of capital regulation and monetary policy to bank risk-taking based on the theory mechanism empirically use China’s commercial bank data.Lastly,this paper put forward targeted policy based on the banking industry special conditions and the problems existing in the capital regulation and monetary policy operation reflected in the empirical research.The main conclusions of this paper are as follows:(1)Under the income and valuation perspective,monetary policy change bank risk-taking by influencing the asset prices and bank income.Regulatory capital can reduce bank credit to quickly replenish capital to meet regulatory requirements in the short term,and prompted banks to examine their assets structure to choose more low-risk assets as the imbalance in the structure of bank assets and mismatch problem in the long term.The empirical results show that monetary policy affect bank risk-taking via "income and the valuation effection" exists,but the bank income is not sensitive to capital regulation.Banks still tend to risky assets in the long term.which weake the capital regulation to inhibit bank risk-taking.(2)Under the profit point of view,the effection of capital regulation and monetary policy on bank risk-taking made differences due to different bank earnings.When banks’ earnings is low inorder that unable to make up for the cost,monetary policy transmission through risk-taking channel deviating the liquidity and policy expectations,and raising the capital regulation level will further enhance the bank’s risk-taking level under the tightening of monetary policy.On the contary,when bank capital return increase,capital regulation can play the role of inhibition of bank risk-taking level,bank risk bearing level will drop significantly under the loose monetary policy.But capital regulation will lead to more tightening monetary policy effection under the tightening of monetary policy.The empirical results show that China’s bank capital yields with double threshold effection,and regulatory capital would curb bank risk-taking behavior only when capital return is higher than the second threshold.Otherwise,capital regulation brings to the bank’s capital holding cost will increase bank’s moral hazard.At the same time,banks are more sensitive to price based monetary policy tools in the case of low income level,and sensitive to quantitative based monetary policy tools in the case of high income level.(3)Under the policy expected perspective,The transparent monetary policy operation rules make bank formed the accurate judgment of the future monetary policy direction and economic prospects which leads to the changes of bank risk-taking level.The existence of capital regulation can also make the bank form regulatory expectations which would make bank face tighter regulation and even punishment with high risk-taking level.Then the bank risk-taking behavior will be convergence to offset the bank’s expectations of monetary policy.By building a DSGE model for dynamic simulation,the results show that China’s bank risk-taking is proportional to the monetary policy transparency,the existence of capital regulation can reduce the correlation of the two above.The reason is that the strengthening of capital regulation allows banks to increase the supervision of the loan,and the higher the level of risk-taking the more capital buffers actually levy a tax on bank risk-taking by means of increasing banks’ capital holdings costs which can educe the banks income from high risk-taking behavior.Under the background of policy expectations and improving policy transparency of the central bank,capital regulators can implement effective regulation of bank risk-taking by transparent regulatory rules which make bank regulation punishment.(4)Under the mindset and insurance perspective,monetary policy impact on bank risk-taking be amplified because of the systemic importance characteristic.Capital adequacy regulation does not constitute a substantial influence because of the sheer size and sufficient capital of systemically important bank.While leverage as a kind of effective regulatory tool actually set a sound capital levels to the bank.It means that a drop in the quality of bank assets will bring down the bank asset value.The cost will be borne more by the commercial banks not by external regulators and government that can make the bank risk-taking decline.The empirical study found that China’s systemically important banks risk-taking level is significantly higher than the non-systematic important banks.The affects of monetary policy to systemically important banks’ risk-taking is higher than the non-systematic important banks’.And systemically important banks take more risk in loose monetary policy environment.Capital adequacy ratio is not ideal in risk-taking control because of systemically important banks in China are large state-owned banks with sheer size and sufficient capital.The regulator of systemically important banks in China should use more leverage ratio tools.This paper put forward policy suggestions in view of the research conclusions above combining with development banks in our country,capital regulation and monetary policy operation characteristics from four aspects:optimize the banks’capital structure and broaden channels of asset allocation to increase the bank sensitivity to regulatory capital,capital regulation and monetary policy coordinationto realize the effective control of bank risk-taking,strengthen policy expectations and improve the regulatory transparency,strengthen the supervision to systemically important banks.In general speaking,the first aspect of the policy recommendations means that the policy authorities need to work on increasinng bank capital allocation channels and epand the bank source of income.Including the optimization of bank capital stock and the capital increment,adjusting the structure of bank assets,reducing banks’ reliance on interest income.The second aspect of the policy recommendations means that regulators should appropriately reducing regulatory levels to increase bank enthusiasm in the low level of banks’ earnings and tight monetary polic environment,choicing monetary policy tools flexibly according to the banks’ earnings level.The third aspect of policy recommendations means that policy authorities should strengthen the guidence of policy expection,improving capital regulation policy transparency including the perfection of market environment and price formation mechanism forming the fundamental for monetary policy expectation guidence.At the same time,improving capital regulation policy transparency to make bank form of regulatory expectations and offset its formation of the monetary policy expection.The fourth aspect of policy recommendations means that regulators should improve the systemically important banks’ total loss of absorptive capacity(TLAC),improving the sensitivity to capital regulation of the systemically important banks and implementation of flexible leverage regulation,Establishing regulatory capital incentive mechanism.