The Impact Of Bank Capital On Monetary Policy Transmission

In a world that financial market is not perfect, commercial banks play an important role in the monetary policy transmission, impact the macroeconomic by changing the scale of loans. Since the implementation of Basel Accord, the bank’s capital adequacy ratio affect the behavior of bank credit and monetary policy transmission mechanism. To meet the minimum regulatory capital requirements, commercial banks is bound to change its risk preference, alter its credit behavior and adjusts its portfolio structure. Credit supply is constrained, thus changes the traditional monetary policy transmission mechanism.This paper first sorts out the domestic and foreign literature of the impact of bank capital on monetary policy transmission. Next reviews the history of domestic and foreign bank capital regulation and analyzes the situation of China’s commercial banks’ capital ratio, China’s banking regulatory constraints has been greatly improved significantly since the hard constraints supervision period. Then the paper builds a theoretical model depicting the relationship among bank capital, monetary policy and bank credit, proving that bank capital enhances the impact of monetary policy on the real economy through bank lending channel and bank capital channel. Using China’s 53 commercial banks annual unbalanced panel data from 2004 to 2012, we find that bank lending channel and bank capital channels are present. In accordance with the characteristics, divide banks into three groups, large state-owned banks, national joint-stock banks and city commercial banks. The results showed that banks with higher capital adequacy ratio are more vulnerable to the impact of monetary policies. And different with foreign research, tightening of monetary policy spreads the net interest margin of banks. Bank capital channel partially offset the effect of monetary policy.The main conclusions are:1. the bank capital constrained changes bank lending behavior. In the short term banks reallocate risk-adjusted asset. In the long term, banks will improve the asset risk management capabilities and expand the bank’s capital supplementary channels.2. Bank capital regulation has a significant impact on the credit behavior of our banks. Bank lending channel and bank capital channel both exist. 3. Supplementary channels of bank capital determine whether the capital is real adequacy. The higher the large state-owned banks and joint-stock banks’ capital adequacy ratio, the ability to withstand the monetary policy risk is stronger. City commercial banks have higher capital adequacy ratio, reducing external expectation on its profitability, thus facing higher financing costs, stronger impact of monetary policy. 4. In order to achieve optimal results, different types of banks should meet differentiated monetary policy.