A Research On The Procyclicality Of Bank's Capital Regulation

Capital regulation is key to prudential banking supervision. Based on the common sense of the importance of capital regulation, there has been a gradual unification of the regulatory capital framework since the publication of Basel Accord in 1988. During nearly two decades' the capital regulation practice, the procyclicality of capital regulation gradually emerged and rose a growing concern.The procyclicality of Regulatory capital refers to the impact of regulatory capital requirement on commercial banks' operating activities, especially on the their credit behavior, has the same direction with the macroeconomic situation. The research of procyclicality regulatory capital is of important practical significance. On one hand, regulatory capital procyclicality research contributes to the formation of good interaction between the commercial banks macroeconomic system. On the other hand, the study of procyclicality regulatory capital helps commercial banks to improve capital management.In this paper, the mechanism of the formation of procyclicality of commercial bank capital regulation is studied and an empirical approach is employed to verify the existence of procyclicality of capital regulation on China's commercial banks. Structurally, this paper is formed of theoretical analysis part and empirical testing part. The theoretical analysis of the capital regulation on commercial banks goes with a framework of subject and object analysis; the empirical test part use the sample of 11 listed commercial banks from 1998 to 2007 to conduct a panel data model to verify the existence of the procyclicality of capital regulation on China's commercial banks. It is also found that the existence of such procyclicality dispends on the size of regulated commercial banks.Based on theoretical analysis and empirical testing, advices are give in the end of this article both on the commercial bank's capital management and regulatory authorities' capital regulation arrangements. For commercial banks, through the use of full-cycle rating methodology and improvement on the loan loss provisions approach, in order to improve its excess regulatory capital holdings procedure; for the regulatory authorities, many ways are available including the enhance the risk sensitivity of regulatory capital, improvement of the overall vision of capital regulation by the use of historical experience based risk curves, more attached concern about rapid expansion of credit in the economic boom and the allowance of related adjustments, as well as the implementation of differential treatment of different sizes commercial banks.