Empirical Analysis The Role Of Capital Buffer To Release The Pro-cyclical Of Bank Credit

Financial system itself, there is vulnerability, and to improve the stability of the financial system, the Basel Committee issued a Basel I "and" Basel Ⅱ, to regulate the global financial system. But the financial crisis has made people aware of the pro-cyclical defects of the new Basel. To overcome the flaws of New Basel Capital Accord, the Basel Committee issued Basel Ⅲ in2010to established a counter-cyclical macro-prudential supervision framework over the global financial system. Basel Ⅲ has advocated that banks should build up countercyclical capital buffers in good times in addition to their minimum capital requirements in order to be able to draw down on these surpluses in bad times.So as that, scholars began a study of the behavior of capital buffers. The study of their key question is whether these capital buffers are built in a pro-cyclical way, i.e. decreased during good times and increased in bad ones. If so, they would not be able to dampen the losses during recessions and would amplify the risks of credit restrictions, thus contributing to worsening output fluctuations. Empirical results are mixed in the economic literature.In this paper, I will study the behavior of capital buffer of china’s banks through empirical. The study included two aspects, the first question is whether the capital buffers is pro-cyclical in china, and the second of course is the most important question in this paper is the role of capital buffers to lessen the pro-cyclical behavior of bank credit. I empirically study the relationships between GDP growth, capital buffers and loan growth with firm-level data for China’s banks over the period2003-2010. Based on panel data simultaneous equations and Granger causality tests, our findings point to mutually reinforcing mechanisms between capital buffers and loan growth.This article is divided into six parts, the first part introduces the background and purposes of the research. Later, i introduce the methods and innovation of this research. The last is the weakness of this article.The second part study on viewpoint of home and broad experts about the pro-cyclicality of bank credit and capital buffer.The third part introduces the pro-cyclicality of bank credit. First, there has a definition of the pro-cyclicality of bank credit, and then study on the pro-cycle theory of bank credit.The fourth part introduces capital buffers.The definition of capital buffers is at first. Later is the introduction of the content of Supervision of the Basel III on capital buffers. And, the last is the theoretical analysis of the effect of capital buffers to the credits of the banks.The fifth part is mainly about the empirical study of the effect of capital buffers to banks’credits.In this part, i first study about the behavior of capital buffers empirically. I divide the samples into two groups, one group include all samples, the other just include small and medium-sized banks.The result is very interesting, for the small sample group the relationship between the business cycle and capital buffers is negative but for large sample group here is a positive relationship between the business cycle and capital buffers, so on a whole there is a positive relationship between the business cycle and capital buffers for banks in china. It means there will be more capital buffers during the boom times to make up for the loss of economic downturns, and during the recession banks can build less capital buffer to prevent the reduction of credit. And then, I have an empirical study of the effect of capital buffers to credits. The result is very interesting, the capital buffers have a negative effect on the growth of credit, but the influence is very weak. Then as the result, I have an analysis, the reason why Capital buffer is positively correlated with the economic cycle, maybe it’s because of the cyclical of capital supplement between state-owned banks,at the same time state-owned banks occupy a large proportion of the share in China’s banking industry. Maybe this is the real reason the capital buffer is positively correlated with the economic cycle but the influence of capital buffer to the growth of credit is not so effective.The last part is about some ideal about how to improve the effectiveness of counter-cyclical regulatory.First, we should improve capital buffer establishment and release mechanism to strengthen counter-cyclical capital buffer regulatory. Second, strengthen the leverage ratio regulation. And the last is to establish a forward-looking dynamic provisioning system. All this will be helpful to weaken the pro-cyclicality of credit.