Procyclicality Of Commercial Banks' Loan Suppy And Its Impact On Monetary Policy

The American sub-prime mortgages crisis broke up in 2007 greatly affected many long-established and large scale commercial banks. A large number of complex portfolios that originally supported the financial market, as well as the leveraged investment vehicles, were dissolved, the derivative market was shrinking, and the relevant industries were influenced. Therefore the market liquidity was substantially decreased. The pirce of sub-prime-related assets were considerably down. Banks had to calculate and distill the subsequent preparation of asset devaluation for potential losses. This further led to the decline of the capital adequacy. In order to meet the capital regulation, banks must reduce risky assets. In order to prevent the financial crisis into being grave economic crisis, governments injected lage amounts of capital into large-scale banks. Capital injection is not only to reduce the possibility of a great many banks'bankruptcy, but also to avoid the credit crunch. The related economic indicators and the acts of adjusting of banks themself bring us new problems deserves considering about.First of all, in different period of the economic cycle, business activities of commercial banks in micro-market have a very clear procyclical character, which shows a significant correlation between the credit cycle and economic cycle. During economic upswings, commercial banks always are over-optimistic about the prospects of the borrower, so they lower credit standards, and the rapid increasing performance of commercial banks is also a strong impulse to stimulate lending. In the economic recession, due to the deterioration of borrower's financial situation prompted commercial banks be more cautious in providing loans, and credit policies tend to be conservative, meanwhile, consider about the decline in performance expectations, risk concerns, as well as the tightening of financial regulation, commercial banks are prompted to accelerate the pace of credit tightening, and loan growth will fall consequently in a rapid speed. This may exacerbate the volatility of the economy, leading to prolonged economic downturn lingered. Commercial banks'procyclical character has an obvious impact on the macro-economy and its damage is also obvious, and the resulting loss of social welfare can not be ignored.Secondly, commercial banks, a single individual, as the mortgage and other asset prices are always procyclical. The non-rational supply of banking credit, the capital adequacy ratio as the representative of the prudential regulation and a number of system level requirements are its root causes. Among them, the procyclical caused by the current regulatory system, which represented by the capital adequacy ratio, is particularly striking. In particular, it has been attached more attention after the new risk-sensitive Basel Capital Accord. According to the provisions the New Basel Capital Accord on risk-weighted assets, the risk weights of assets will experience a counter-cyclical fluctuation. Excessive emphasis on the risk-sensitivity required by capital will enhance the procyclical effects and enlarge the economic cycle volatility. In the recession period, compared with the boom, banks will be subjected to more stringent capital constraints. At the same time the cost of raising new capital in the economic recession period will be higher than the boom.Finally, the monetary policy is counter to the economic cycle. The central bank adopted various monetary policy tools and instruments to conduct macro-control, for guiding and stabilizing social economic agents'expectations. Before the economy climbed the peak or dropped to its lowest, the central bank will take effective macro-control measures to prevent the macro-economic fluctuations is too large, focus on smoothing the business cycle fluctuations, in order to achieve the steady functioning of the national economy.The micro commercial banks'procyclical behavior and the central bank's reverse cycle regulation are often in contradiction and conflict. This makes, on the one hand, we need to focus on the banking industry's credit procyclical as well as to prevent the risk of individual banks, on the other hand, and we need to use monetary policy instruments through the appropriate channels to prevent economic fluctuations.