Study On China’s Small And Medium Commercial Banks’Capital Regulation

The study on the validity of banking capital regulation is always on the top list ofthe researcher and the financial practice. In history, every financial crisis certainlyevokes the introspection and revolution of banking supervision. Commercial banks’capital adequacy regulation is an important means that the regulatory authorities makeuse of the capital adequacy ratio to supervise on commerial banks’ capital and maintainthe stability of the commercial banking system. With no exception, this paper is alsoaiming at answering the question whether China’ small and medium banks’ capitalregulation is effective. Firstly we reviewed the domestic and international researchliterature on the validity and the efficiency of capital regulation. Then we reviewed thehistory of banking supervision theory and historical practice context, throwing somelight on the bank’s capital and banking capital regulation. We retrospectively studied thebanking capital regulation theory and practice. When it comes to the post-crisis era, thepaper especially summarized the changing process of Basel Capital Accord, illustratedthe latest revise and gave the opinion on how to implement Basel Capital Accord inChina.On the path of combining theoretical analysis with empirical research, the paperanalysis China’s small and medium commercial banks’ capital regulation status andproblems,such as minimun capital requirement, the cooperation between thepre-commitment approach（PCA）and the ordinary supervision.In order to validate oursmall and medium commercial banks’ capital regulatory effectiveness, we select11small and medium sized commercial banks2004-2012data for empirical analysis intwo aspects (the bank capital regulation and bank risk controls; capital supervision andmonetary policy transmission, the level of bank credit and the macroeconomy). Theresults show that bank capital regulation can effectively control the risk and helpmaintain long-term macroeconomic stability; we made a theoretical analysis andempirical research on loss reserves for commercial banks(ie debts), provided a realisticpath to reach capital adequacy ultimately by providing adequate provision, indicatingthe effectiveness of bank capital regulation is significant. The paper compared thepresent situation of medium and small sized banks’ capital supervision in American,raised several references on China’s small and medium banks’ capital supervision,attempting to search for the foundation of improving supervision’s flexibility. At last,by using the game theoretical approach, we researched the authenticity of capital adequacy information, which is disclosed by the listed banks. The paper made theproposal on the establishment of capital focused flexible banking supervisory system. Inorder to improve the supervisory efficiency, the paper suggests that the supervisoryauthority should make the capital regulation more flexible, meaning that multi-tiercapital requirement adopted to make supervisory policy more applicable, together withappropriate supervisory measures implemented according to banks development.Generally, the study follows the ideology which lies in two aspects. On one hand,from the dynamic view, the world banks capital adequacy requirements are constantlychanging—the requirements are getting more and more strict—due to periodicallyeruption of financial crises. On the other hand, when we statically focused on thepresent situation, we came to the point that the current minimum capital requirement isrelevant with the supervisory development. Moreover, the counter-cyclical capitalrequirement resulting from subprime loan crisis has made the banking capitalsupervision push its way to flexible supervision. This ideology not only guides the study,but also offers the feasibility of the establishment of capital focused flexible bankingsupervisory system. As for the necessity is concerned, studied in a long run, thecapital focused flexible banking supervisory system has to be established to help thepre-commitment approach （PCA） and the ordinary supervision cooperate smoothly,especially when the supervisory requirement isn’t relevant with bank’s operation (suchas information disclosure and risk preference). And what’s more, this system inherentlyrequires the supervisory authority introduce different capital requirement according tobank’s development stage and size.