Research On The Pro-cyclicality Of Capital Adequacy Ratio In Commercial Banks Of China

Since financial crisis erupted in2008, discussion about the pro-cyclicality of financialsystem becomes heated. Many specialists realize the defect of financial regulation policies.In order to mitigate pro-cyclicality, countercyclical buffer is widely concerned. Both ofBasel Ⅲ Accord and China’s Administrative Measures for the Capital of CommercialBanks (for Trial Implementation) have introduced the countercyclical capital buffer andproposed to set macro-prudential regulatory framework. So, in the context of new policies,study on pro-cyclicality of capital adequacy ratio(CAR) in China has strong practicalsignificance.In theory part, firstly, this article analyses the Basel Accord’s related requirement, andthen expatiate the theory about pro-cyclicality, including its internal and external reasons,its influence and mitigation measures. Subsequently, combining with the practice of capitalregulation in China, the paper analyses the current situation of CAR in Chinese bankingindustry and its pro-cyclical characteristic, also it finds out our exploration oncounter-cyclical supervision. In empirical part, based on the panel data of sixteencommercial banks between2004to2011, the paper studies how the CAR changes as GDPfluctuates, the empirical result shows that CAR will increase as GDP grows, and deceaseas GDP falls. This characteristic is more obvious durning economic boom. And for thosestate-owned banks, the influence of GDP on CAR is bigger.Finally, the article offers some advice to both banks and regulators. For commercialbanks, considering the higher and higher CAR requirements trend, banks should activelychange the mode of operation, increase profitability ability, improve the internal financingchannel and achieve the equilibrium between profit and risk. Regulators should increasethe consciousness of macro-prudential management, improve and perfect detailed rules ofcountercyclical policy, strengthen the coordination among different regulators and activelyparticipate in international cooperation.