Study On Capital Adequacy Regulation And Behavior Of Commercial Banks With A Reference To Macroeffect Of Capital Constraints

From the birth of1988Basel Accord, the capital adequacy regulation has graduallybecome the core and the international standard of the prudential banking supervision.Although there have being many disputes concerning how capital adequacy regulationcould affect banking microscopic behavior, with the increase of the risk sensitivity ofcapital regulation, the macroeconomic effects of capital adequacy regulation hasbecome the focus of attention both in theoretical literatures and supervisory practices.Especially after the international financial crisis in2008, the people realized that thesum of the micro-prudential supervisory is not sufficient to maintain macroeconomicstability. The interaction between external rules, such as Basle Accord, and internalfactors of the financial institutions has triggered the pro-cyclical and caused greatimpact on economic fluctuations. The rapid spread of the crisis has proved that changesin monetary policy will change the risk perception and risk tolerance of the financialsector, and cause the movement of the market risk premium and affect the risk appetiteof economic sectors. Combining the micro-regulatory mechanism and macro-prudentialsupervision has become the main direction of international financial reform after thecrisis.From the point of microscopic behavior, banking capital and risk adjustingbehaviors are a long-term gradual process. In this process, the minimum capitalrequirement set by the capital regulation actually increases the bank’s cost of capital,and then may change the cost-benefit decisions and portfolio allocation. Theinternational financial crisis has shown that with the deepening of financial innovationand globalization, the contact between banking microscopic behavior and externalmacro environment becomes increasingly close. On one hand, macroeconomic volatilityand capital adequacy constraint as external shocks may affect banking capital and riskadjusting behaviors and strengthen their cyclical characteristics. On the other hand, inthe constraints of the capital adequacy, the changes of banking behavior would bereflected in changes in banking credit decisions, and would form the bank capitalchannel and risk-taking channel of monetary policy, and in turn affect the operation ofthe macroeconomic. With the gradual opening up of China’s financial markets, depthand systematic researches of these issues above can enrich the understanding of thecontact between banking microscopic behavior and external macro environment and can provide policy supports to improve the capital regulatory and promote the efficiency ofbanking regulatory in China.According to this research logic and employing the qualitative and quantitiveapproaches, this dissertation probes into the interaction between the externalmacroeconomic and banking microscopic behavior in the constraints of the capitaladequacy. Based on the theory of capital buffer, a theoretical model is developed toanalyze that how banks will adjust the asset allocation responding to an adverse capitalshock. The economic cycle and market structure, as external shocks, are introduced intomicroscopic study framework developed by Shrieves and Dahl(1992), and thecapitalization and risk-taking behaviors under the capital adequacy requirement ofChinese commercial bank between2004-2010are empirically investigated. The effectsof bank capitalization and risk-taking behaviors over banks’ loans growth and theexistences of bank capital channel and risk-taking channel of monetary transmissionbetween1998-2010are tested. Compared with the existing researches, innovative worksof this dissertation are mainly reflected in the following aspects:Based on the theory of capital buffer, a theoretical cost-benefit model, withpunishing function imposed by the bank regulator and loan market conditions andmanagement costs, is developed to analyze that how banks will adjust the assetallocation responding to an adverse capital shock. The model shows that, in theconstraints of the capital adequacy, banks respond to an adverse capital shock byreducing total lending. The different reduction scale between high-risk loans andlow-risk loans depends on whether risk-weights are distinguished.The cyclicality hypothesis and relationship between banking capital and riskendogenous adjusting behaviors under the capital adequacy requirement are empiricallytested by constructing simultaneous equations model including economic cycle, marketstructure as macro environment variables. The results show that the shift of capitalregulatory in China from “soft constraint” to “hard constraint” effectively improves thecapital adequacy of commercial banks. Although the capital regulatory plays a capitalthreshold effect, it does not play a capital framework effect to inhibit the tendency ofcommercial banks’ investment in high-risk and high-yield assets.On the basis study of Altunbas et al (2010), the effects of bank capitalization andrisk-taking behaviors over banks’ loans growth and the existences of bank capitalchannel and risk-taking channel of monetary transmission are tested. The results showthat, in the process of assets adjustment, the rise of the risk assets does not play constraint on credit issuance, and the effects of monetary policy transmission mayamplified by risk-taking behavior of commercial banks, what might be termed the“risk-taking channel” of monetary policy. After the implementing of RegulationGoverning Capital Adequacy of Commercial Banks, the capital regulatory strengthenscapital constraints on the decision-making of the commercial banks credit and thecapital level of banks influence the effects of the monetary policy transmission, whatmight be termed the “bank capital channel” of monetary policy.The relationship of capitalization, risk-taking behaviors and credit expansion ofChinese city commercial banks are empirically investigated. The results show that thecapital regulatory is effective in the improvement of capital adequacy, but not in theconstraint on risk-taking behaviors. Endogenous financing, such as profitability andcost management, plays a limited role in raising the level of capital. The citycommercial banks follow the extensive mode of development, with strong inertialexpansion of credit issuance, invalid control of risk level and the insufficientmanagement of assets liquidity.