The Research On The Impact Of Capital Constrain On Monetary Policy Transmission In China

After the2008global financial crisis, the Basel Committee launched the Basel Ⅲ,in order to raise capital standards, to maintain the stability of the banking operation.Western economists think the bank credit channel of monetary policy transmissionplay an important role in banks, and banks are key carrier of monetary policytransmission, the capital constraint will hurt bank credit, inhibit economic growthand impact the country’s competitiveness. Based on these reasons, America, EU andpart of the Basel member countries showed their voice of postponing the agreement.China has introduced capital constraint rules since1993. In2012, Chinese BankingRegulatory Commission issued <the commercial bank’s capital management approach(trial)>, the official Chinese version of <Basel Ⅲ> launched. By studying theimpact of the capital constraints on monetary policy transmission, this paper prov esthat the higher capital adequacy ratio of the banks the more vulnerable these banks tomonetary policy. During the financial crisis and post-crisis era, easing monetarypolicy may stimulate bank loans which under capital shortage, releasing bank’s capitalconstraints.Firstly, this paper sorted out relevant paper about the impact of capitalconstrained on the monetary policy transmission. Based on the research of AngeloBaglioni(2007),this paper showed how the capital constrain impact monetary policytransmission. The results shows that: the effect of monetary policy transmissionrelated to the ratio of undercapitalized banks in the market. The greater the ratio ofthe undercapitalized banks in the banking market, the more interference these bankson monetary policy transmission. Conversely, the monetary policy transmissionconduct more smoothly.By utilizing some macroeconomic data and the bank characteristics data from2000to2012for a cross section of15Chinese banks，and examining the impact ofcapital constrain on monetary policy transmission in China under Basel byestablishing the fixed effects panel regression model，the results shows that the effectof monetary policy went smoothly in capitalized banks, and was interfered byundercapitalized banks. After the global financial crisis in2008,the cuts in reserverequirements have relaxed capital constrain.In addition, the empirical results show that: China’s large banks reacted less tomonetary policy shocks when compared to medium-size and small-size banks. In the condition that China has obvious bank credit channel, we can say that China’s bankcredit channel is led by medium-size and small-size banks. China’s monetary policyconducted smoothly in banks with low NPL ratio, and was interfered in banks withhigh NPL ratio.