Study On Banking Pro-cyclicality And Capital Buffer Tools

The aims of the paper is to analysis the pro-cyclicality of commercial banks in our country under the Basel Accord, and try to find a specific feasible countercyclical financial tool which will dampen banks’pro-cyclicality and reduce its influence upon economic fluctuation.The paper includes two major parts. The first part is the proven analysis of banking pro-cyclicality in our country and its mechanisms based on four aspects of commercial banks: capital regulation, provision requirements for loan losses, leverage ratio and fair value accounting. Using the quarterly data of the macro-economy and credit from year1993to2011, a SVAR model is built to generate the impulse response function between GDP and Loan. The result shows that the above indexes are promoted by each other and proves the existence of banking pro-cyclicality. The purpose of the second part is to create a rule-based countercyclical capital buffer tool. The General Equilibrium Analysis towards demand and supply of loan with the goal of bank profit maximization suggests that banks’optimal capital adequacy ratio is affected by the factors of Credit and GDP. Comparing some groups of variable and its combination,"Credit/GDP" GAP is the best guideline for the signaling action to instruct building and releasing the countercyclical capital buffer. After prescribing highest and lowest capital buffer, the guideline is transformed to a piecewise function of countercyclical capital buffer, then the feasibility of the function is particularly tested by using the quarterly data of GDP and Credit in China from year1933to2011.The empirical result shows that four periods of countercyclical capital buffer are needed in the above time period, and the countercyclical capital buffer transformed by "Credit/GDP" can forecast the potential crisis at early days of capital buffer building period and protect banks from vastly loss at the releasing period. Meanwhile the paper, aiming at the features of the guideline and the specific status of our economy, provides five basic instruct rules for countercyclical capital buffer, suggests combining "Credit/GDP" with other macroeconomic indexes and some qualitative factors as policy changes to establish a comprehensive and rational policy tool of countercyclical capital buffer.