Applicability Test Of Counter-cyclical Capital Buffer Mechanism In China Under Basel â…¢

With the improvement of the openness of China’s banking system, bankingsupervision is more difficult, and international banking regulatory cooperation is moreimportant. In October2010, the Basel Committee published The Basel III Accord inwhich for the first time put forward a counter-cyclical capital buffer framework. Inthis context, it is of great significance to examine the feasibility and rationality ofcounter-cyclical capital buffer mechanism in China’s regulatory practices ofcommercial banks. In order to study the applicability of counter-cyclical capital buffermechanism in China under Basel Ⅲ, following work was done:First, the paper reviews the various versions of Basel Accord and focuses on thenew changes of latest Basel Accord in2010, expounds China’s latest capital adequacyregulatory philosophy, the latest capital adequacy regulatory documents andtransitional arrangements.Secondly, summarizing China’s banking system’s the development environment,operating conditions and capital adequacy, find that China’s commercial banks havean advantage: a long-term gap between the deposit and loan guarantee higher profits,lower leverage; Disadvantages: weak liquidity risk management, internal riskmanagement system lag, lack of long-term capital replenishment mechanism. Facingopportunities: mixed operation for the development of intermediary business providesa broad space, raising the level of economic development and residents’ incomemakes commercial bank profitability prospects; challenges: the liberalization ofinterest rates will break the bank’s original loan-to-deposit, China commercial bankshomogeneity is serious business, the diversification of China’s banks face increasedcompetition in the financial sector is gradually opening up.Third, build counter-cyclical capital buffer decision model. After empiricallytested data of China’s major commercial banks from2001to2011, found that: mostcommercial banks’ capital buffer relative to the GDP growth rate has a pro-cyclical;NPL ratio and total production yield have a greater impact on the capital buffer; loangrowth capital buffer level differences between the large state-owned banks andjoint-stock banks, the state-owned bank capital buffer is more susceptible to thenegative impact of rapid loan growth. Fourth, apply the credit/GDP indicator proposed by the Basel CommitteeGuidelines to quarterly data for the13years from2000to2012. Analyzing the resultsof the spreadsheet, found that China’s commercial banks should be required toconserve capital buffer in2002Q2~2005Q1,2009Q2~2011Q3and2012Q1~2012Q4.The capital buffer accrued cycle is coordinated with China’s economic and bankingdevelopment cycle. Analyzing the correlation between Credit/GDP gap and theBanking Climate Index by PBC, found that Credit/GDP gap is a leading indicator ofBanking Climate Index. Credit/GDP indicator has good applicability in China’sbanking supervision.Finally, make recommendations to improve China’s banking counter-cyclicalcapital buffer mechanism. China’s banking counter-cyclical regulatory need to basedon China’s own conditions and at the same time, learn from other countries, take astep by step implementation. Banking regulators should establish specialcounter-cyclical capital regulatory decision-making departments, test and adjustcapital buffer linked variables in practice, and pay attention to the cooperating ofcounter-cyclical capital buffer mechanism and macro-control tools. Commercialbanks should improve their internal risk control mechanism, expand capitalsupplementary channels, and strengthen liquidity management, in order to enhancethe capital adequacy ratio of the elastic response to the upcoming counter-cyclicalcapital requirements.