Bank Capital Buffer And Portfolio Risk Of Chinese Listed Banks: Impact Of Business Cycle And Revenue Diversification

Capital requirements have become one of the main instruments of today’sbanking regulation. Following the Basel accord, financial institutions’ supervisorsaround the world should pay close attention to changes in the capital adequacy ratio ofinstitutions and impose minimum requirements. We can say that the main objective ofBasel Ⅱ is to build closer ties between banks’ risk taking and individual capitalrequirements. In order to promote the healthy development of asset-liabilitymanagement, the new regulatory framework motivates banks to hold an adequatelevel of capital which corresponds to their risk-taking decisions. Clearly, reasonablecapital adequacy ratio levels vary during the business cycle. There is sufficientevidence that the bank’s credit default probability significantly different duringeconomic expansion and economic recession. In boom times, because companiesgenerally have good operating condition, so the possibility of default is smallerrelative to the recession. Therefore, the amount of bank capital required to coveragainst unexpected losses related economic conditions.The financial management authority of our nation also uses the Basel Agreementfor reference and takes the capital adequacy ratio as one of the main instruments toregulate the banks. Banks consider risk profile of their portfolios when deciding onthe amount of capital buffers and the level of banks’ asset risk will be changedaccording to the general economic conditions. The Chinese banking industry has beensteadily shifting away from traditional sources of revenue and toward themultiple-revenue structure of both net interest income and noninterest income due tointerest rate liberalization and financial disintermediation. There is ample evidenceshowing that revenue diversification and bank risk are closely related. However, mostresearch focus on the cyclical patterns of capital buffer, few people incorporate therelationship between banks’ capital buffer and risk adjustment and real economysimultaneously in empirical model.This paper uses an unbalanced panel data of16Chinese listed banks from2002to2012to analyze the relationship of bank capital buffer、 macroeconomicdevelopments、portfolio risk adjustments and revenue diversification. The result isthat Chinese listed banks’ capital buffers have obvious countercyclical characteristics,and the countercyclical characteristics of large state-owned banks are weaker. Revenue diversification help bank to reduce capital buffers. The relationship betweenportfolio risk and business cycles is negative. Finally, revenue diversification reducesthe level of bank’s risk.