A Study On The Impact Of Capital Regulation To The Credit Structure Of China's Listed Commercial Banks

As financial intermediary institutions, commercial banks play an important role in the foundation of the national economy. With the financial reform allover the world, it is imminent to establish the framework of global banking supervision to improve the global financial system. In 1974,the failure of Franklin National Bank and the German Herstatt Bank, both in the initial developmentof the international financial innovation, reveals the huge potential risks faced by commercial banks in the wave of economic globalization. The Basel Committee came into being at that time. In 1988, it introduced the "Convergence of Capital Measurement and Capital Standards Agreement" called "Basel I", which provided a unified international bank capital regulatory standards for the first time from three aspects of the definition of capital, minimum capital requirements and risk weighting coefficient, creating a favorable external environment and promoting the steady and healthy development of fair global banking. However, in "Basel I"the definition of risk was too narrow which didn't cover all types of risk faced by the bank. The division of capital was not clear and the definition of capital was too broad, which affected the quality of capital. Based on the "Basel I" defects Basel Committee announced the "Convergence of Capital Measurement and Capital Standards:A Revised Framework" called "Basel II" in 2004, which formed the capital regulatory framework based on three pillars of bank minimum capital requirements, regulatory authorities supervision and the market discipline. It made breakthroughs in risk coverage and calculation methods, but there were still some defects such as high complexity of calculation methods, too narrow risk coverage and inadequate regulation of off-balance sheet business and the "shadow banking" system. The financial crisis in 2008 revealed the "Basel II" drawbacks, so Basel Committee in 2010 released the "Basel III" on the basis of extensive discussions to strengthen supervision of global financial risks mainlyfrom the micro-prudential and macro-prudential aspects. It completed capitalframework, expanded the coverage of risk, introduced leverage and liquidity monitoring indicators based on the minimum capital requirements, at the same time, it set aside additional capital requirements such as capital buffers, counter-cyclical capital buffers and system-important banks' extra capital requirement. "Basel ?" is the effective supplement of "Basel ?" which improvesthe global financial system regulation.To meet the international banking supervision standards and enforce muchstricter regulation for domestic banks, China Banking Regulatory Commission hasissued a series of guidance documents based on the actual situation of China's banking industry to make it more targeted, flexible and practical. Among the documents, the capital regulation in the "commercial bank's capital adequacy ratio management approach" referred as the old "approach" and the "commercial bank's capital management approach?Trial?" referred as the new "approach" have animportant effect on China's commercial banks, especially on commercial banks' credit structure. Capital regulation makes restrictions on bank credit and changes the risk appetite of commercial banks, stimulating the adjustment of their credit structure. Commercial banks' credit structure determines the flow of funds and have a major impact on the profitability and risks of the banks. There currently exists many issues in China's commercial banks' credit structure, which need urgent adjustment. Therefore, this paper attempts to study the relationship between capital regulation and credit structure through horizontal comparison of banks classification and longitudinal comparison of regulatory period classification.Firstly, this paper combines the related literature that study on the impact of capital regulation to banks' credit supply and credit structure, foreign and home. In the relationship between capital regulation and credit supply, most foreign scholars conclude that capital regulation will cause some limitation on credit supply behavior of commercial banks to a certain extent and the result is from the research of capital regulation-credit supply transmission mechanism and different impacts of different banks, and domestic scholars' research findings are divided into insignificant and significant results from the research of different impacts of different banks and periods. In terms of the relationship between capital regulation and credit structure of commercial banks, domestic and foreign scholars holddifferent views. Some argue that capital regulation will cause commercial banks to increase credit assets in riskier assets, such as business loans, credit loans, long-term loans, while the others hold the opposite views. This paper summarizes the senior scholars' research and studies the effects of capital regulation on China's listed commercial banks' credit structure on the basis of theoretical and empirical analysis.In theoretical research, this paper demonstrates the relationship between capital regulation and commercial banks' credit structure based on three models:?1?establish mean-variance model to study the optimal asset allocations under the capital regulation and different asset allocation programs for commercial banks with different capital;?2? starting from the profit function, make use of the balance sheet of commercial banks to find the optimal profit equation based on cost-profit measure;?3? establish a simple linear programming model to find the optimal configuration in feasible domain of high-risk and low-risk credit assets and compare banks with different actual capital adequacy ratio.In the empirical research, the idea of this paper is to study whether strict capital controls affect commercial banks' credit structure from the "old approach" period to the "new approach" period. It selects semi-annual data of 15 listed commercial banks from 2009 to June 2015, including Industrial and Commercial Bank of China?GS?, China Construction Bank?JS?, Bank of China?ZG?, Agricultural Bank of China?NY?, China Merchants Bank?ZS?, Bank of Communications?JT?, Shanghai Pudong Development Bank?PF?, China Minsheng Bank?MS?, Industrial Bank?XY?, Ningbo Bank?NB?, CITIC Bank?ZX?, China Everbright Bank?GD?, Beijing Bank?BJ?, Huaxia Bank?HX?, Ping'an Bank?PA?.Due to the limited data available, Nanjing Bankis not included in the sample, so it covers 195?13*15? data. Interpreted variable in this paper is the credit structure?LS?, including personal loans to total loans ratio?IL?, company loans to total loans ratio?CL?, individual housing mortgage loans to personal loans ratio?IHL?, credit loans to total loans ratio?XL?. Explanatory variables to measure capital amount are primarily from four types:?1? capital adequacy ratio?ZC?;?2?core capital adequacy ratio?HZC?;?3?dummy variables obtained from the division of excess capital adequacy ratio on the thresholds of 0,2% and 4%?ZC₁, ZC₂, ZC₃?;?4?dummy variables obtained from the division ofexcess capital adequacy ratio's distribution function?SWC, WC, UC?. In addition, the paper covers the banks' internal variables and macroeconomic variables as control variables, including the size of banks?AR?, return on assets?ROA?, loan to deposit ratio?LD?, net interest income ratio?NIL?, equity ratio?EA?, non-performing loan ratio?DL?, GDP growth ratio?GG?, CPIG growth ratio?CPIG?. It argues that the credit structure of commercial banks are mainly influenced by the last capital amount and last control variables and establishes a static panel model to make regression analysis and comparison from multiple angles to obtain robust empirical results:?1? starting from the whole listed commercial banks, study the relationship between capital regulation and credit structure under the regulatory period of the old "approach" and the new "approach". From the time effect, the credit structure of China's commercial banks become more stable and reasonable, with 15 listed commercial banks increase the proportion of personal loans, decrease the proportion of corporate loans and slightly increase the proportion of credit loans. From the regression analysis, four models are established to find the relationship between the capital regulation and credit structure and conclude that in the "old approach" period capital adequacy ratio of commercial banks affects the proportion of personal loans and personal housing mortgage loans negatively and affects the proportion of corporate loans and credit loans positively, while in the "new approach", the last relationship has changed due to the changed risk weighting coefficient of personal housing mortgage loans.?2? study on the classification of listed commercial banks by ownership. From the regression analysis, the relationship is the same, but the impact is more significantfor joint-stock commercial banks.?3? study on the classification of listed commercial bank by capital adequacy. It divides the 15 commercial banks into classes of capital-adequate and capital-restricted commercial banks according to assets-weighted average excess capital adequacy ratio from 2009 to 2015.From regression analysis, the relationships are the same but the impact of capital regulation is more significant for capital-restricted banks. Overall, commercial banks will adjust their credit structures according to capital amount. the lower?high? the capital amount, the larger?small? commercial banks that face capital constraints are inclined to undertake low-risk?high-risk?, less?more? capital consumption loans.Finally, this paper proposes policy recommendations from both regulatory department and commercial banks. For the regulatory department:?1? adhere to capital regulation, implement differentiated supervision and establish a sound system of risk oversight;?2? carry out their duties to reduce the transfer of benefits and shirk responsibility at the same time strengthen communications between regulatory authorities and commercial banks and improve the establishment of appropriate incentives and punishment;?3? develop China's stock market to offer a wide range of effective financing instruments, cultivate emerging debt market and actively expand multiple financing channels to relieve small enterprises' financing difficulties, increase bank capital supplementary ways and improve the efficiency of our economy. For commercial banks:?1? establish long-term stable multiple capital replenishment mechanism, verify the necessary complement of capital amount by periodic stress tests to avoid emergencies where commercial banks face greater capital risk;?2? further promote credit structural adjustment and develop the capital-saving business model;?3? improve risk management refinement and closely monitor credit funds to ensure that funds flow to the real economy rather than financial speculation field.