Research On Effeteness Of Capital Adequacy Ratio On Credit And Economy

Based on the explanation of capital requirements and its evolution, this paper recalled the impact of capital adequacy ratio (CAR) regulation of Basel Accord on bank credit and economy in major developed countries. Meanwhile, we analyzed the implementation of the capital adequacy ratio regulation and its impact; on the basis of theoretical studies, the author discussed the economic theory of the CAR taking effect on credit and economy, and empirically studied the impact of CAR regulation on bank credit and economy in China. The results show that the CAR would have a certain degree of influence on bank credit, output and monetary policy transmission. The conclusion is meaningful for the full implementation of the new Basel Accord.The full text is divided into six parts.Chapter 1 is the Introduction. This chapter introduced the background and significance of the study and reviewed the related literature. Related research literature is mainly concerned with the following areas: Whether and How the CAR impacted on bank credit, monetary policy and economy. Summary of the related literature is the basis of the study. However, related research hadn't quantitative analysis of the extent to which the CAR effects on economy and by what mechanism.In Chapter 2, we discussed the capital requirements of Basel Accord and its evolution. This chapter introduced the capital requirements and its changes of Basel Accord from three aspects: the definition and composition of capital requirement, Calculation of risk assets, the minimum capital adequacy ratio of the "Basel Accord".Chapter 3 studied the implementation of CAR and its impact. First, we had inspected two typical cases: the United States and Japan, which shows that the implementation of CAR regulation have an important impact on the national economy. In the early 1990s, Both the United States and Japan implemented the Basel Accord. However, there comes the credit crunch and recession after the implementation of Basel Accord. This part provided the empirical support for our study. Next,the article analyzed the implementation of capital regulation, commercial banks current capital situation and its impact on the bank credit and economy. Through the analysis of data, we can see that the increase in CAR of banks resulted credit crunch. This is consistent with other study results. The results show that capital regulation will cause credit crunch. This Chapter provided a basis for quantitative empirical analysis below.In Chapter4, The author discussed the theoretical mechanism how CAR have an impact on credit and economy. First, the credit crunch caused by capital regulation is a direct way to impact the economy. The impact of the CAR is conducted in two phases: 1. capital regulation led to the credit crunch of commercial banks; 2. credit crunch had an impact on economy; Second, Capital adequacy ratio would have an impact on monetary policy. Main mechanism is as follows: 1. the micro Mechanism. First, the CAR will affect the"credit channel mechanism"of the monetary policy. Second, under the capital regulation, the bank capital would affect the credit channels of monetary policy. We called"bank capital channel". 2. The macro mechanisms: Capital adequacy ratio will increase the impact of tightening monetary policy and reduce the impact of expansionary monetary policy. The conclusion of this part is the basis of empirical studies in the next chapter.Chapter 5 is the empirical study of the impact of CAR regulation on bank credit and economy in China. Based on the model raised by Leonardo Gambacorta and Paolo Emilio Mistrulli (2003). We used GMM estimation method to estimate the model. After building the VAR (vector auto regression) model, we used the impulse response function to analyze the credit's impact on economy. The results are as follows: if the CAR reduced by 1%, credit would reduce by 0.31%; CAR also influenced monetary policy. "Bank capital channel"exists. It is probably because those commercial banks in China had serious maturity mismatch phenomena; around 1% reduction of CAR would lead to output declined by 0.5%, its impact is very small; The CAR doesn't significantly affect prices. It also doesn't affect interest level. Because of the special interest rate management system of our country, the interest rate will not be affected. Chapter 6 is the main conclusions of this study, and we also raised policy proposal to eliminate the adverse effects of capital regulation. The main solution is to change the mode of operation of commercial banks in China, optimize the bank's asset structure and establish an effective mechanism for supplementary bank capital. Thus, the adverse effects of capital regulation would gradually weaken, and the implementation of the new Basel Accord will play an increasingly active role in China.The main innovation of this paper is mainly reflected in the following points:1. Through the theoretical analysis, the article got the theoretical mechanism how CAR has an impact on credit and economy. Because previous research has not explained the specific mechanisms, so this is one of the main innovations.2. On the basis of the foreign theories and empirical studies, this paper empirically studied the impact of CAR regulation on bank credit and economic in China. From the perspective of quantitative, we analyzed the extent to which CAR impact the credit and economy, also verified the monetary policy effects existence.3. This paper mainly based on CAR-credit-economy research ideas. This makes this paper more closely and logic. However, in the process of quantitative analysis, the data is hard to be collected, so we use some alternative indicators, which will influenced the accuracy of the conclusion.