Study On The Macro And Micro Effects Of Bank Capital Requirements

Bank capital requirement has long been a heated-debate topic in the field of finance and economics. The effects of capital requirements on bank behaviors, macro-economy and the transmission of monetary policy have drawn extensive attention by academic and professional experts, especially after the outbreak of the2007financial turmoil. Drawing lessons from the very crisis, the Basel Committee revised the extant accord, and enacted the Basel Accord Ⅲ (hereinafter referred to as Basel Ⅲ). With the widely adoption of Basel Ⅲ worldwide, the banking industries for most of the countries will be confronted with stricter capital regulatory environment, leading to a chain of reactions by the commercial banks. These responses are not only reflected on banks’day to day risk preferrence and portofilio choices but their optimal decisions in different periods of business cycles and monetary policy stances. So far, extant research has not given an in-depth study on the above-mentioned topics. This paper aims to fulfill this gap theoretically; the related results could also benefit the regulatory authorities to objectively assess the impacts of Basel Ⅲ.This paper presents the following questions:(1) what is the relationship between the former framework of Basel Accord and the2008financial crisis?(2) What effects will stricter capital requirements exert on banks’risk-taking and lending behaviors? Will banks’reactions vary if they have different capital structure and amount?(3) What effects will the stricter capital requirement have on bank lending channel of monetary policy? Are there any differences in phases of monetary expansions and contractions?(4) How does a bank adjust its capital buffer in different periods of the business cycles? What are the characteristics of capital buffer adjustment in China? Is there anything special in China’s banking industry?To solve the above-mentioned issuss, this paper, based on theoretical models of Peek&Rosengren(1995), Tanaka(2003), Heid(2007) and economic analysis, formulates the theoretical foundations and sets up a comprehensive cross-border banking database, which contains104countries and regions, over1700commercial banks with more than100,000observations in the time span between1997and2011. We use the framework of Paasche and Laspeyres Index, dynamic panel one-step system GMM estimation methods, as well as long-term elasticity coefficients have been used to conduct the empirical study.The results show that:(1) capital regulatory arbitrage and pro-cyclicality incurred by capital requirements are two important reasons leading to the financial crisis.The capital regulatory arbitrage is more common in developed countries, whose commercial banks tend to improve their capital ratios by decreasing their risk-weighted assets;(2) the increase (decrease) of banks’capital buffers will lead to a rise (decline) of banks’risk-taking and lending behaviors, and the two sensitivities are significantly affected by banks’capital distribution and structure;(3) central bank’s monetary policy in China asymmetrically affects bank lending behavior. Small banks are found more sensitive to contractionary monetary policy in the Chinese context. Well capitalized banks appear to be more likely to adjust their lending behaviors in response to expansionary monetary policy, and conversely, undercapitalized banks tend to adjust with the advent of contractionary monetary policy. The importance of the bank lending channel declines after China introduced stricter capital requirements in early2004, but the effect is still apparent in times of expansionary policy.(4) From a global perspective, the bank’s capital buffer takes up a negative correlation with the fluctuationso of the macro-economy. Banks with different characteristics and under various economic environments will have different capital buffer decisions in face of the fluctuations of macro-economy, some types of banks even show a counter-cyclical capital buffer patterns.