Research On Impacts Of Capital Adequacy Rate On Credit And Economy In China

The Global Financial Crisis imposed a prudent impact on the world’s economy. After the crisis, people draw a conclusion that the insufficient of financial regulation was the main cause. Therefore Basel III was built, which started a new framework of financial regulation. Recently, China also sped up its regulation on capital adequacy rate in order to control financial risk. However, historically, many countries would encounter credit crunch to certain extent after regulating the capital adequacy rate, which restrict economic development. Therefore, to study the impact of capital adequacy rate on credit and economy is significant.This article consists of five chapters.Chapter one is an introduction which is divided into four parts:the first part introduces the study background including an introduction of the Global Financial Crisis, the content and evolution of Basel Agreement and its progress in China; the second part introduces the significance of the study of capital adequacy rate which becomes more and more important toady and imposes an obvious impact on credit and economy; the third part investigates the objective and framework of this study; the fourth part indicates the innovation and difficult points of this article.Chapter two conducts literature review at home and aboard. It focuses on three respects:research on the impact of capital regulation on credit crunch and economy; research on the impact of capital regulation on monetary policy; research on the impact of capital adequacy’s procyclicality on credit and economics. This chapter states the origins and progress of development of these theories, which is the preparation to the coming theoretical analysis.Chapter three is theoretical analysis which explains the impact of the regulation of capital adequacy rate on credit and economy. To be specific, the regulation of capital adequacy rate will give rise to credit crunch, monetary policy effect and pro-cyclicality effect and they will affect credit and economy. Firstly, the credit crunch effect indicates that the rise of capital adequacy rate could impose a direct impact on banks’ credit size and thus affects the economy, which can be showed as, capital adequacy rateâ†'credit sizeâ†'economic growth; secondly, the monetary policy effect indicates that the monetary policy of central bank will affect bank capital and then will affect capital adequacy rate and finally will change the economy, which can be showed as:monetary policyâ†'bank capitalâ†'capacity adequacy rateâ†'credit sizeâ†'economic development. There are three channels that the monetary policy works: balance sheet, bank lending and bank capital; lastly, pro-cyclicality indicates that regulation of capital adequacy rate is with the same direction of macroeconomy, which means in the ascending stage of business cycle, the regulation of capital imposes a positive effect on macroeconomy and in the descent stage, the regulation imposes a negative effect.Chapter four is empirical analysis. This article uses the China seasonal data from2008to2012and extracts variables of capital adequacy rate and total loan amount of commercial banks, and GDP to do the empirical research. By analyzing the impact from capital adequacy rate on the other two variables, we found that recently in China, the rise of capital adequacy rate imposed a negative effect on credit size and economic behaviors, but the impact on economy was not obvious.The fifth part is a summary and some policy suggestions. The final conclusion of this article is that the rise of bank adequacy capacity rate could cause credit crunch and thereby, restrict the growth of economy. The suggestion includes suggestions for regulatory authorities and commercial banks.