Monetary Policy,Bank Credit Growth And Loan Loss Provision

Since the21st century, economic globalization has become an inevitable trend of global economic development, while the financial globalization has become its booster. The financial globalization not only means the international trade, but also the convergence of accounting standard what regimes adopt in practice. The Accounting Standards for Business Enterprises No.22,"Financial Instruments Recognition and Measurement", which is the most important part of loan loss provision regulation in China, is the result of the convergence process. However, the loan loss provisioning rules that ISA39is based, called the incurred loss measure, has been argued reinforcing the financial crisis since the subprime financial crisis in2008. Loan loss provision is designed in response to bank credit risk in terms of accounting information, which also constitutes a bank’s risk early warning mechanism. Although the provisioning rules did play a pivotal role on banking regulation at the early days of its establishment, its pro-cyclical exposed when the financial crisis occurred. Under pressure of social parties who imputed the financial crisis to the pro-cyclicality of loan loss provisioning rules, IASC published "Financial instruments:amortized cost and impairment" draft (IFRS9), which orders that banks’provisioning behavior should base on an expected loss model instead of the incurred loss model. However the expected loss model has much unreasonable place whether about its basis theory or its implementation, so our political authorities chose to improve the current provisioning model rather than adopted the new model. However, because loan loss provision is the most important accrual selection for commercial banks, and be influenced by many factors, and thus the direction of provisioning model improvement has vet to be instinct. After the financial crisis, except for a debate of loan loss provisioning rules, people have also given a lot of attention on the government’s macroeconomic regulation and control policy during the economic downturn. In China, in response to the2008financial crisis, the government adopted a series of control measures, such as appropriately loose monetary policy, expansionary fiscal policy, in an attempt to curb the spread of the financial crisis by means of government intervention. From the macroeconomic point, the means of control and the degree of intervention are both advantages and disadvantages for the economy as a whole. But more good than harm or more harm than good, has brought another debate.Started with loan loss provision model, this study analyses the feature of our banking’loan loss provisioning practices. In2012, there are153commercial banks in total, of which only17are listed but its total assets account for about80%of the total assets of all commercial banks, and there are about60%that are state-owned banks. From the data, we know that the listed banks and unlisted banks in China can represent different groups feature, and thus the study of loan loss provision should divide the total commercial bank sample into two sub-samples of listed banks and unlisted banks. With regression analysis, this study finds that Chinese commercial banks, whether listed or unlisted, are subject to the current non-performing loan rate and the marginal non-performing loan rate, and to the stability of financial operations in the provision for loan impairment loss, such as the significant profits smoothing motivation and signal transduction motivation. Nevertheless, in the capital management motivation, listed and unlisted banks have differences in behavior. The listed banks’capital management motivation is more obvious than the unlisted bank sample, and its capital adequacy ratio is significantly lower than unlisted banks’. In other words, the listed commercial banks with lower capital adequacy ratio have more motivation to manage capital by loan loss provision. This motivation that represents banks’concern about capital adequacy, will enhance the pro-cyclical of provisioning rule. So Chinese regulators should strengthen the regulation of capital adequacy ratio and try hard to avoid "too big to fail" happened.In this paper, after the analysis of fact and research about Chinese macroeconomic, the dummy variable of economic downturn is designed, and then be used in the model of loan loss provisioning and lending behavior. The loan loss provision model empirical results show us that there is a positive correlation between loan loss provision and the dummy variable, which means the provisioning measure is pro-cyclical that is remarkable both in listed and unlisted sub-ample banks. According the results of bank lending model regression, the positive coefficient of loan loss provision and loan growth, which means the pro-cyclical of provision proved by some scholars, put the pro-cyclical of our bank provisioning practices further.Based on the benchmark model of bank lending, this paper starts to do some research about the impact of loan loss provision on bank lending behavior with introducing the economic dummy variables. Then it is found that the coefficient of the interaction is positive significantly, which means that the pro-cyclical of provisioning is weakened by something happened in economic downturn. In order to find out the real reason of loan loss provision pro-cyclical weakening in the economic downturn, this paper analyzes Chinese macro-control policy and its transmission mechanism in sample period.Monetary policy is an important mean of national macroeconomic regulation and control, and the fact proved that our government is good at intervening our economy through monetary policy or fiscal policy, and the degree of intervention is much more than the Western countries’. According the analysis of Chinese monetary policy in the sample period2005-2011, it is found that our government adopted a kind of appropriate loose monetary policy in economic downturn period, otherwise a kind of tight monetary policy. That is to say that our government in the sample period tried to regulate the economy by counter-cyclical monetary policies. According to the theory of the monetary policy transmission mechanism, though the government’s monetary policy cannot act directly on the micro-economies, it will have an effect upon the behavior of enterprise through certain channels, and thus realize its original target. As many scholars’study, there are several transmission channels of monetary policy, such as interest rate channel, exchange rate channel, and asset price channel and bank credit channel. In China, because the interest rate channel is restricted, and the exchange rate channel cannot work obviously, the role of asset price channel is difficult to play, so the credit channel becomes the main form of Chinese monetary policy transmission channels. Bank credit transmission mechanism is that the central bank use monetary policy tools to influence the behavior of bank lending, and bank credit behavior will have an impact on the investment and financing behavior of the enterprise, and then the monetary ultimately play a regulating role in the overall economic. There are two ways of the mechanism acting, named bank credit way and balance-sheet way. The former one is that central bank use monetary policy tools to regulate the supply of base money, and affecting the scale of commercial banks lending. The latter one is that the central bank’s monetary policy will have an effect on the net asset value of borrower which is the important information for banks’ decision of lending.In order to verify the impact of monetary policy on bank credit behavior, this paper analyzes regression coefficients of Chinese monetary policy variables in the in the model of commercial bank lending, like the change of the interest rate of lending or the change of the base money supply. From the regression results, it is found that Chinese monetary policy have positive impact on bank credit growth, which means government’s policy cannot have counter-cyclical effect. However, in the economic downturn, the appropriately loose monetary policy the central bank adopted had a negative impact on the bank credit growth, which means that the smaller the benchmark lending rate growth, the bigger bank credit growth. In other words, Chinese appropriately loose monetary policy during economic downturn can achieve the counter-cyclical control goal. In conclusion, the pro-cyclical effect of loan loss provision on bank lending has been weakened during the economic downturn, because the growth of bank credit is slowdown due to government’s counter-cyclical regulation through monetary policy. Therefore, Chinese monetary policy can reduce the pro-cyclical effect of the loan loss provision on bank lending behavior, and reduce damage of the financial crisis on entire economy.In this paper, the whole sample comes from database and complemented by checking and reading accounting report, becomes the solid foundation for the analysis and verification of the assumption. Multiple regression analysis revealed the main factors of loan loss provisioning of Chinese commercial banks, as well as the performance difference between listed banks and unlisted banks. On the basis of the conclusions of previous studies, this paper further verifies them, and extends the results to the loan loss provisioning behavior of all commercial banks, not only listed but also unlisted. Also by combining theoretical analysis of the actual situation analysis, this study generated creatively dummy variable of the economic downturn in China. Loan loss provision model and bank lending model were rebuilt by introducing the dummy variable of economic downturn and its interaction. In addition, through the analysis of monetary policy’s effect on bank lending in different economic cycles, it study that whether and how the government’s monetary policy works in the micro-economy. Finally, this paper demonstrates the moderately loose monetary policy during the economic downturn in China does the regulation effect, and effectively cut off the further spread of the financial crisis reinforced by the loan loss provisioning pro-cyclical. So it provides powerful evidence of the utility of Chinese monetary policy during the economic cycle.