Intermediate Business Of Commercial Bank And Procyclicality

The current debate on the possible procyclicality of the new Basel Accord pays little attention to the procyclicality created by intermediate business. This analysis aims to prove the existence of procyclicality in intermediate business, explore the influencing channel on economic system and provide some advice for banking supervision.This paper investigates both direct and indirect factors inducing procyclicality in intermediate business. The demand of intermediate products and the accounting method, fair value, consist the direct part of procyclicality. To find out indirect factors, this thesis applys agency theory and herd theory and discovers that executive compensation, salary policy, fame of bank, structure of intermediate business market, as well as the homogenenous intermediate products will result in procyclicality.Also, influencing channel of procyclical intermediate business is found in this thesis. Since intermediate business profit will be calculated into net income, economy will be fluctuated due to large scale of credit capital, resulted from the increase of core capital in which net profit is added.At the end of this research, several advice related to the factors inducing procyclicality in intermediate business have been provided.