Asymmetric Impact Of Capital Regulation On Bank Credit

This paper divides the asymmetric effects of capital regulation on credit into twokinds of direct and indirect effects. We study the impact of capital regulation on bankloans from the point of view of the asymmetric effects. We analyze the impact ofcapital regulation on bank credit and credit channel effects in different businesscycles and monetary policy in different directions. The conclusions of the theoreticalanalysis are that capital regulation pressure will inhibit the growth of bank credit; thestrength of this inhibition is greater in prosperity than that in a recession, which formsthe directly asymmetric effect of capital regulation. Capital regulation pressure willalso influence the effects of monetary policy on bank lending. Capital regulationmakes it hard for an easing of monetary policy to stimulate credit to increase. On theother hand, capital regulation makes it more effective for a tightening of monetarypolicy to hinder excessive growth of credit. That forms the indirectly asymmetriceffect of capital regulation.On that basis, the paper presents China’s commercial banks’ capital adequacyratio, loan growth, monetary policy, combined with capital and business cycles ofChina. We obtain the preliminary evidences of the asymmetric effects of capitalregulation on bank credit.Further more, we collect quarterly data of China’s16listed commercial banksand macro-economy from the first quarter of2004to the first quarter of2012. Webuild three unbalanced panel data regression model for sample banks, banks of highcapital adequacy rate and banks of low capital adequacy rate, to test the directly andindirectly asymmectric effects that we conclude from the theoretical analysis. Themajor conclusions of empirical study are as below: Firstly, the increase of capitalregulatory pressure will lead to a decline in loan growth, and the rate of decline isgreater during the recession, which verifies the asymmetric effect of capital regulation.However, the direct asymmetric effect in the banks of high capital adequacy ratio isnot significant. Secondly, due to the existence of capital regulation, when the centralbank raises interest rates, credit drops more. But when central bank lowers interestrates, the extent of credit increase will be cut. That verifies the indirectly asymmetriceffect of capital regulation. The indirectly asymmetric effect in the banks of lowcapital adequacy ratio is most significant. Thirdly, direct asymmetric effect of capital regulatory pressure can also exacerbate pro-cyclicality of bank credit. Indirectasymmetric effect of capital regulation pressure will strengthen the asymmetry of theeffects of monetary policy, which makes expansionary monetary policy more fatigue.Based on those theoretical and empirical results, we propose that commercialbanks establish full-cycle rating models. Capital regulatory authority shouldimplement counter-cyclical capital adequacy ratio standards. The central bank canadjust the strength of monetary policy in different directions. And commercial banksshould make efforts to improve the capital adequacy ratio etc.