Empirical Analysis On Procyclicality Of Commercial Bank Lending

Procyclicality of commercial banks has long been accused of amplifying thefluctuation of economy and exacerbating financial crises when market falls intoturmoil. As a result, looking into the inner mechanism of commercial bankprocyclicality and its empirical effect on the financial market could provide someclues to regulatory authorities to dampen the volatility of economic development.To study the procyclicality of commercial bank system, we explored two mainmechanism flaws that could lead to the amplification effect. Capital regulation thatlimits bank lending power during depression could drain out liquidity and aggravatecrisis. In addition, IRB (Internal Rating Based) approach is a risk measuring methodwith procyclical parameters which highly positively correlated. These features couldmake commercial bank lending more procyclical and exacerbate crises. In addition,the financial crisis happened during1996-1997and2007-2009also showed thatprocyclicality was an essential cause in leading the crisis to a more severe position.Furthermore, empirical study was conducted to explore the procyclicality featureof bank lending and asset prices in China. Using monthly data from1999to2011, wedid Granger causality test and impulse test to look into the interaction betweencommercial bank lending and asset prices. The result showed that bank lending hassignificantly impact on asset prices like real estate and stock market, but asset pricesdo not have equal effect on bank lending. Procyclicality might not be a severeproblem in China because of strict regulatory practice and incomplete financialsystem.