A Study On Effects Of Basel Protocol On Transmission Channels Of Monetary Policies In China

Monetary Polices have played the role of macroeconomic control in China since People’s Bank of China became the "true" central bank in 1984 and abandoned credit limit control in 1998. The market oriented reform of monetary policies for 20 years has layed foundations for Credit Channel of monetary Policies, and enabled impact on transmission of monetary Policies of banking supervision through bank credit. In recent years, failure in monetary policy transmission has been observed:high growth rate of M2 and record high M2/GDP together with repeating "money shortage"both in the banking system and the real economy. The predominant Credit Channel makes relevant research necessary and inevitable.With the implementation of "Capital Supervision of Commercial Banks" from Jan.1,2013, Chinese banking supervision comes to the era of "Basel Ⅲ (Chinese Version) ". Capital adequacy ratio supervision has been the kernel from Basel Ⅰ to Basel Ⅲ. Because of the defect revealed by the global financial crisis, Basel 111 revises the procyclicality of Basel Ⅰ and Basel Ⅱ, by raising the standards of bank capital, improving the measurement approach of risks, and putting forward the Capital Conservation Buffer、Countercyclical Capital Buffer and Capital Surcharges for Systemically Important Financial Institutes. Basel Ⅲ also sets up the framework of Leverage ratio supervision and Liquidity supervision, as well as Macroprudential supervision. The implementation of "Basel Ⅲ (Chinese Version)" reflects the continuing strengthen of capital adequacy supervision by the China Banking Regulatory Commission, making it the key bound variable affecting the transmission of monetary policies.The paper tries to investigate the influence of bank behavior on transmission of monetary policies, on the background of reinforced bank capital supervision. The research is on the basis of conclusion and analysis of existing literature, and from the viewpoint of micro behavior of domestic commercial banks, including pricing of bank loans, performance evaluation, capital supplement, and "shadow banking".The paper comes to a conclusion that, the main reason for the inefficiency of monetary policy transmission is the uncoordinated monetary policy and bank supervision policy, while impact on the transmission mechanism of monetary policies by Basel III (Chinese version) remains to be seen.The pricing of domestic bank loans is still floating around the benchmark interest rate published by PBOC. Game analysis and model analysis both show that, the pricing model of bank loans has distinct influence on credit supply, as well as transmission of monetary policies, which is outstandingly affected by capital adequacy supervision. RAROC pricing model has been the inevitable choice of commercial banks under capital adequacy supervision.Comprehensive performance evaluation system, emphasizing value management, has taken shape in domestic commercial banks. Analysis also shows that, performance evaluation has distinct influence on transmission of monetary Policies. Similarly, RAPM system has been the inevitable choice of commercial banks under capital supervision.Capital supplement has became the key issue for sustainable development and equal competition of Chinese commercial banks, although the current pressure of capital supplement is not so critical. Because of the insufficient supply of capital instruments, capital supplement may cause turbulence of capital markets and exert a negative effect on transmission of monetary polices, in the case of information asymmetry. However, in the case of inside capital finance, without information asymmetry, the effect is neutral.Shadow banking grows out of global excess liquidity, regulatory arbitrage, and innovation of banking products, with characteristics of lack of supervision. Analysis shows that shadow banking has negative impact on stability of financial system and transmission of monetary policies, which makes the coordination of monetary policies and banking supervision policies facing a new challenge. So, we can come to a conclusion that banking supervision should be strengthened, instead of being released.The feasible policy choices for Monetary policy authority (PBOC) and supervision authority (CBRC) include to enhance the coordination of monetary policies and supervision policies, to formulate reasonable capital adequacy requirement for commercial banks, to improve risk pricing system for bank loans, to set up rational guidance for performance evaluation, to strengthen the guidance and supervision of innovation, and to strengthen the supervision of liquidity.The main innovation of this paper is, on the basis of latest progress and research of Basel Agreement, the domestic monetary policy and bank supervision policy, firstly defines "Basel Ⅲ (Chinese version)" in a comprehensive way, and analyzes its impact on the transmission of monetary policies from macroscopic to microscopic angle, with the view of micro management behavior of commercial bank, including loan pricing, performance appraisal, capital supplement, as well as innovation (shadow banking). An organic analysis system, especially the prospective study of shadow banking, gives this paper strongly practical significance. The main shortcomings of this paper includes, that the quantitative analysis still needs to be strengthened, and the influence of Basel Ⅲ (Chinese version) on monetary multiplier and money circulation velocity, as well as the influence of loan provision regulation and dynamic provisioning system on transmission of monetary policies is still need to be further improved.