An Empirical Research Of Chinese Commercial Banks On Relationship Between Credit Activity And Business Cycle

In recent years the issue of the possible procyclicality of banks'activity has drawn the attention of both academics and policy makers. Indeed, to guarantee macro and financial stability, it is crucial to understand whether, and to what extent, banks are affected by the evolution of the macroeconomic environment and whether second round impacts occur. On the one hand, if the business cycle does influence banks, financial surveillance may need to be strengthened during recessionary phases, when banks are more likely to become fragile. On the other hand, if banks'reaction to macroeconomic shocks exacerbates the effects of the downturn, it is appropriate to establish rules aimed at alleviating the procyclicality of banks'operations.The stylized facts suggest that at the beginning of an expansionary phase in the economy firms'profits tend to increase, asset prices rise and customers'expectations are optimistic. Expansion of aggregate demand leads to a remarkable, often more than proportional, growth in bank lending and in the economy's indebtedness. During the boom banks may underestimate their risk exposures, relaxing credit standards and reducing provisions for future losses.After the peak of the cyclical upturn, customers'profitability worsens, borrowers'creditworthiness deteriorates and non-performing assets are revealed, thus causing losses in banks'balance sheets (cyclicality). This may be associated with a fall in asset prices that, in turn, further affects customers'financial wealth and depresses the value of collateral. Moreover, the possible rise of unemployment reduces households'disposable income and their ability to repay their debts. Banks'risk exposure increases, thus requiring larger provisions and higher levels of capital, at the very moment when it is more expensive or simply not available. Intermediaries may react by reducing lending, especially if they have thin capital buffers above the minimum capital requirement, thus exacerbating the effects of the economic downturn (procyclicality). The procyclicality of commercial banks may increase the risk of themselves, moreover, it even destroy the macroeconomic environment. In fact, the credit operation of Chinese commercial banks also shows the procyclicality, therefore, it is of great practical significance to make analysis of Chinese commercial banks on the relationship between credit operation and business cycle. This paper provides a comprehensive investigation of these issues using a panel of Chinese commercial banks whose data are available for the period 2002-2009. In particular, analysing both credit risk and liquidity risk, this paper investigates whether the two kinds of risk show a cyclical pattern.The paper is structures as follows:The first part is introduction. In this part, the author details the background and significance of this paper, and then gives specific structural arrangement. Chapter 1 is the theory's summary. In this part, the author has comprehensive explainations on the literatures focused on the relationship between credit activity of commercial banks and business cycle. In this way, the author has further clarified the thoughts and ideas of this article. In chapter 2, the author analyses the relationship between《BaselⅡ》and credit activity of banks. In chapter 3, the author analyses the relationship between credit activity and business cycle. Chapter 4 is concerning of the econometrical models about credit risk and liquidity risk. In Chapter 5, the author reveals the procyclicality among credit activity of Chinese commercial banks through the empirical study about credity scale, credit risk and liquidity risk. After all of the study above, the author presents some suggestions about credit and liquidity risk management.Through the comprehensive research on credit activity of Chinese commercial banks, it is shown in this paper that there is close relationship between business cycle and credit activity of commercial banks. So the regulatory authorities should strengthen the risk management of commercial banks so as to reduce the financial damage on the real economy.