The Impact Of Leverage Ratio Requirement On The Business Operation Of Listed Commercial Banks In China

Leverage ratio requirement was used widely as a regulatory tool early in banking development. Capital requirement did not substitute for leverage ratio requirement until Basel Committee on Banking Supervision passed Basel Accords I in1988, after which capital requirement became the leading indicator of the international banking supervision. With the Basel Accords Ⅱ going into effect, complicated risk weighting model took place of the simple method in Basel Accords Ⅱ. The outbreak of Sub-prime Mortgage Crisis in2008triggered the argument about the effectiveness of supervision frame under Basel Accords Ⅱ. The international banking generally believed that it is essential to reinforce the risk management of banks. In December,2009, Basel Committee on Banking Supervision passed Basel Accords Ⅲ, which proposed that using leverage ratio requirement as the supplement of capital requirement and set a restriction of3%. China Banking Regulatory Commission followed the Basel Accords Ⅲ timely and passed the Regulations on Leverage Ratio Requirement of Commercial Banks in June,2011. The above Regulations stipulates the concrete issues, such as the calculation method of leverage ratio and the restriction of4%.Whether leverage ratio requirement could effectively control the risk and asset quality of banks? Whether leverage ratio requirement could adapt to banking sector in China? Whether the new regulations launched by China Banking Regulatory Commission could correspond to the development level and direction of the banking sector? This paper intends to answer these questions via theoretical analysis and empirical study.This paper introduces bank’s risk theory model to analyze the different risk behaviour when banks are faced with capital requirement, leverage ratio requirement respectively and dual-constrain. The conclusion is as follows:when banks face dual-constrain, banks with higher assets quality face stricter leverage ratio requirement; while banks with lower assets quality are mainly constrained by capital requirement and the leverage ratio requirement is limited. This kind of bank regulation does not take account of banks’assets quality, which will limit the return on assets of banks with higher quality assets and lower risk, and then force them to expand their risky assets to exchange higher profit. Only by that, they could compete with other risky banks. This consequence contradict with supervisory authority’s intention to lower banks’risk-taking behaviour.On the basis of theory analysis, this paper calculated the leverage ratio of the listed commercial banks in China according to the Regulations on Leverage Ratio Requirement of Commercial Banks, and then analyzed the status of reaching standards of them. The data revealed that there is little pressure to satisfy the leverage ratio requirement for large and medium-sized commercial banks in the short term but the contrary is the case for the partly medium and small ones. But when combined with the development patterns of commercial banks in China, the banking sector would face the long-term pressure to replenish capital. Then, this paper verified the relationship of leverage ratio and possibility of default (PD), which showed that the conclusion of theory analysis is basically consistent with the empirical results of our country. The unfairness embedded in leverage ratio requirement would strengthen the unfair competition of banking and may lead to adverse selection in capital markets. This paper also carried a composite analysis about the impact of leverage ratio requirement on the business operation of listed commercial banks in China from the following aspects:traditional deposit and lending business, off-balance sheet business and derives business.At last, this paper drew conclusion and come up with several suggestions to supervisory authority and regulatory objects respectively.