Capital Adequacy Ratio Requirements On Bank Lending Channel

This paper studies the role of bank capital in the transmission of monetary policy in the presence of the capital adequacy regulations. While capital requirement have grown in importance for bank since the 1988 Basle Accord and 2004 Regulation Governing Capital Adequacy of Commercial Banks in China, traditional monetary theory has largely ignored bank equity, emphasizing instead reserves and reserve requirements. This dissertation is an attempt to fill this gap based on related studies.In the first part, the bank equity problem is outputted by analyzing the hypothesis, main viewpoints, reserve variant and shortcomings of the traditional Bank Credit channel. In the analyzing process, we found the importance of reserves in monetary transmission is weakening, while bank equity strengthening. So adding the bank capital conditions to monetary transmission process is reasonable. In the second part presents two models. In the models, capital conditions are added in to analyze their influences to bank loans and the economy. A main result is that monetary policy effects on bank lending depend on capital adequacy of banking sector, lending by banks with low capital has a negative reaction to monetary shocks relative to well capitalized banks. Combined with a maturity mismatch on the bank's balance sheet, this give rise to a Bank Capital Channel by which monetary policy affects bank lending through its impact on bank capital.In the third part, bank level empirical data in China are investigated. An important result is that the bank capital channel does not exist in present China,but it is likely true after China regulating on bank capital strictly. Based on previous studying, some policy advises also are provided.