Empirical Study On Cyclical Behavior Of China’s Bank Capital Buffers And Risk Adjustment

In2010,"Basel III" emphasized that under the8%minimum capital adequacy ratio; commercial bank should hold a certain capital buffer to against risk and maintain the stability of financial system. Therefore, capital buffer not only become the core of commercial bank supervision, but deepen the research in academia. This paper starts from "Basel Accord" as its theoretical basis, focus on the changes in capital buffer,collect an unbalanced panel data of60China’s commercial banks from2006to2012.This paper has done empirical research on the cyclical behavior of capital buffer and the relationship between capital buffer and risk adjustment via GMM analysis method.The results can be concluded as follows:firstly, since2006, the capital adequacy ratio of China’s commercial banks are increased gradually, meanwhile the ability of risk control and risk taking has enhanced consistently. Secondly, China’s commercial bank capital buffers are pro-cyclical.Namely, there exists the robustly negative relationship between capital buffer and position in cycle. The pro-cyclicality will extend the upturn and aggravate the recession adversely. Thirdly, the estimation shows as well, under capital regulation, the relationship between capital and risk adjustment is significantly positive. Nonetheless, the relationship is negative for the capital buffer below4%. Hence, we show that the management of adjustments to capital and risk is dependent on the degree of bank capital buffer. Fourthly, the positive relationship between capital buffer and risk adjustment would expand pro-cyclicality effects; on the contrary, negative relationship would relieve pro-cyclicality effects.In accordance with the empirical conclusion, we will provide a number of practical recommendations in this paper:firstly, improve the decision-making process of capital buffer to relieve the negative effects of pro-cyclicality. Secondly, distinguish the regulatory policies of the different bank size. Thirdly, strengthen the ability of risk self-management and reducing the dependence of state support.