Capital Requirements, Regulation Procyclicality And Monetary Policy

Capital regulation on the commercial bank is the core of Basel Capital Accord, andit’s also the key to prudential banking supervision. However, with the developing anddeepening of capital supervision, its procyclicality effects on macroeconomics drawattention from more and more people.The procyclicality of capital supervision mean that the requirement of commercialbanks’ capital adequacy ratio, in actuality, has an influence on the credit conducts of banks,exacerbates economic fluctuation, motivates economy, and finally affects the cycle ofeconomy. The formulation of monetary policy is usually counter-cyclical, which is incontradiction with the procyclicality effect of capital supervision. Furthermore, capitalregulation, to some extent, imposes capital restriction on commercial banks, and furtheraffects the credit conduct mechanism of monetary policy, which results in differentresponses from commercial banks with different amount of capital when they areconfronted with monetary policy. Therefore, capital supervision, as a matter of fact,influences the results of monetary regulation; besides, when making monetary policy, it isimperative for the Central Bank to take the unfavorable effects of capital supervision intoconsideration, actively take measures, and ensure the optimal results of monetaryregulation to the largest degree.