The Research On The Counter-Cyclical Regulation Of Banking

The Subprime Mortgage Crisis brings “Procyclicality” and “Counter-cyclicalRegulation” into peoples’ vision. Based on this background, The paper discusses thecauses of procyclicality of the banking industry, and releases ome counter-cyclical policytools from the perspective of the banking industry practice.In the discussion on the factors causing bank procyclicality, based on the frameworkof the New Basel Capital Accord, the paper analyzes the procyclicality of bank throughthe credit activities, capital regulation, reserves for loan losses, the internal rating-basedapproach and the fair value accounting standard. The credit activities of the bank,reserves for loan losses has a pro-cyclical characteristics, while the procyclicality of thecapital regulation enlarged the pro-cyclical effects of bank credit behavior. The internalrating-based approach brings along the risk of bank procyclicality while enhancing risksensitivity. Moreover, the failure of fair value accounting standard during the period ofthe crisis accelerates the procyclicality in the economic system.In response to these factors caused the bank procyclicality, this paper discussescurrent available counter-cyclical regulatory policy tools. For Capital regulation, thepaper proposes the countercyclical adjustment programs of dynamic capital adequacyratio and leverage ratio supervision and mortgage rates supervision. For the release of theprocyclicality caused by internal rating-based approach, the paper introduce parametersmeasuring economic cycle and improve the risk weight function. For accounting standard,the paper discusses the directions for the fair value measurement.Based on the discussion above, this paper summarizes the progress of counter-cyclical regulation made by the international organizations, and make somerecommendations on how to improve our counter-cyclical regulatory policy.