A Study Of Commercial Bank Capital Adequacy Assessment Based On Macro Stress Testing Method

The Basel III is aware of that capital management lacks macro-prudential perspective,and puts forward the countercyclical capital buffer framework, which demands provision for a percentage of the systemic risk capital requirements during the boom. Through the analysis of the principle of easing bank procyclicality between countercyclical capital buffer and macro stress testing framework, the paper consider that the combination of them can further enhance the soundness of the financial system. On one hand, it is necessary to combine discretionary macro stress testing framework with countercyclical capital buffer which adjusts automatically, the combination can effectively prevent systemic risk caused by sudden macroeconomic shocks and the stress testing result will provide a quantitative basis for the release rate and the proportion of countercyclical capital buffer. On the other hand, countercyclical capital buffer framework is mainly designed to ease procyclicality of excessive credit growth, and it lacks consideration of procyclicality of default probability, so it is necessary to introduce capital adequacy assessment process which is based on macro stress testing to ease this effect.Therefore, the paper puts forward the capital adequacy assessment based on macro stress testing method,which is used to determine the proportion of additional capital buffers for relief of the credit procyclicality caused by change of probability of default and ensuring that banking capital can resist macro shock. Capital adequacy assessment process is the reverse form, it reversely calculates the buffer capital ratio of the banking system by study the credit quantity of banking system afer absorbing credit loss caused b y macro shock. Different from the "Basel III which used difference between the ratio of credit to GDP and its the long-term trends as capital buffer provision standards, the capital buffer ratio is due to credit loss, default probability variations and acceptable credit capacity under stress scenario. The regulatory authorities can use this method to carry out quantitative scenario analysis discretionarily according to changes of potential risk,clear the ability of banking capital to resist system risk and the change of credit quantity,thus the risk can be corrected early.The first part of the capital assessment framework is the measurement methods of economic capital under macroeconomic shock. The paper studies two kinds of stress testing method, economic capital can be calculated on this basis of them :(1)Improved statistical method of stress testing. The paper changed the residual correlation hypothesis of CPV model, the new economic meaning is given, thus the risk transmission model and scenario generation model can independently handle. The partial least squares method is used to estimate conduction model, which solved the multicollinearity problem, and more macroeconomic factors can be incorporated into model,thus we can get more accurate loss distribution.(2)Macro stress testing method of expansion of single factor model.When the default rate datas are difficult to obtain or time series are too short, method based on statistical model will fail; secondly, even if the data is sufficient, the variable selection and the change of statistical method will consume too much work, thus the macro stress testing analysis is limited. Therefore, a new macro stress testing is constructed to consider industry difference which is based on the single factor model.The method is introduced a new model of risk conduction without having to rely on statistical regression, at the same time the variance and procyclicality of historical default rate are put into default model by analytical and Monte Carlo simulation method,which ensures the accuracy of the measurement of economic capital in various industries under macro shock.The banking system will face the increase of risk after absorbing credit loss, and it will affect the amount of credit that units of capital can support, the process dynamicly simulate the procyclicality of banking credit, which is the second part of the capital assessment framework. It is very difficulty to directly get the relationship between default probability and the economic cycle, so this paper indirectly obtains the default probability through the transition probability of macro economy. the probability of industry default in different stages of the economic cycle, consists of two discrete part of boom and recession default rate. The macroeconomic cycle is divided into two discrete state, combined with the macroeconomic state transition probability, the paper gets the probability of industry default at different stages of the economic cycle.Finally, by using 1970-2012 industry default rate data of Moody company and the world bank’s GDP growth, an empirical study on capital ad equacy evaluation was carried out. The results show the strong procyclical industries need to hold higher capital buffer ratio in the same macro stress scenarios and credit growth condition s. China’s economy has entered a new normal lower growth rate, the interest rate market reform is deepening, the ability of banking capital to withstand systemic risk should be carefully assessed to reduce the negative impact on economy caused by the procyclicality.