Procyclicality In The Basel Ⅱ And Choice Of Risk Measuring Models

Due to they more prior to risk assets,bank regulator methods which are on the basic of the minimum bank capital requirements(CARs) certainly result in procyclicality.It may bring on turbulence in finance market and induce even larger risks in economy.The regulation department should pay attention to the procyclicality effect under the BaselⅡAccord and make commercial banks choose the appropriate risk measuring models.According to MM theory,if the tax or the bankrupt existed,the composition of capital can affect the value of company.Due to commercial bank talented with high debt and limited liability,the minimum bank capital requirements(CARS) method is necessary.It is better than other regulations,such as deposits insurances which may cause the risk of moral hazard problem.Then refer to Chiuri,Ferri & Majnoni(2000) model,use derivative analysis to find out the difference of lending if the CARS method put on commercial bank or not.And the results show that if the commercial bank monitored by the method of CARS,the higher lever of CARS the more reduction of lending.Generally speaking,when the bank carry out the supervision about the lowest capital requirement,especially followed with the establishment of the bank's inter credit risk measurement.Commercial bank credit decreases in recessions and expands in recoveries.And it is the same with the macroeconomic cycle when it too hot or too cold.It also makes the bank's system which depend on the supervision about the lowest capital requirement become a magnifying instrument of the macro economic cycle swing.And finally it will do harms to the stability of macro economy and financial system.Then,we analyze the procyclicality in the BaselⅡ,including the standard methods and the inner rating methods.We concluded that the choice of risk measuring model is the big reason to cause high procyclicality of bank asset. So we improved it by using Moody's KMV model in China financial market.The end,we give some suggestions to monitors to avoid and reduce the procyclicality in supervisor.The most important two suggestions are that we should supervise the commercial bank to choose or develop the risk measuring models which can avoid and reduce the procyclicality.And it is important for the commercial bank to establish long time default probability transfer matrix.