The Research Of China’s Counter Cyclical Capital Buffer Mechanism Based On Discriminating Early Warning Signal

Procyclicality is the dynamic interaction between the financial sector and the real economy (positive feedback mechanism). The design of Counter-cyclical capital buffer system aims at encouraging banks to reserve capital in economic boom periods, and reducing capital during the economic downturn. Counter-cyclical capital buffer is not a minimum capital requirement. Actually, it is an additional capital requirement exceeding the minimum capital and the retained capital. This is for the requirement of absorbing loss in recessions.China’s counter-cyclical capital buffer mechanism design and the implementation of facing reality:When commercial banks began to reserve and release of the counter-cyclical capital buffers? How to avoid the overly subjective judgments of the bank regulatory agencies for excess capital accumulation and release of the counter-cyclical situation? How to establish a counter-cyclical buffer of capital accumulation itself with the changes in economic variables indicators release mechanism?According to the analysis of the pro-cyclical causes and impact of the banking sector, this paper adequately addresses the necessity of a counter-cyclical capital regulation, Summarizes the implement of counter-cyclical capital buffer both home and abroad in the current phase, and proves the rationality of establishing the counter-cyclical capital buffer on the basis of bank behavior model. Based on regulatory preferences, the early warning signal model compared the candidate indicators and then selected the two "Credit/GDP gap" and" M1/Completed investment in fixed assets "(which has relatively good behavior) and the integrated indicators constructed by them as the early warning signals indicators of counter-cyclical capital buffer mechanism. Draw on the Basel Committee estimates countercyclical buffer capital model, and uses data of the1992to third quarter of the2011to calculate counter-cyclical capital buffer. The author then discusses the principles, specific operation modes and operation frequency of establishing Counter-cyclical capital buffer mechanism. This article eventually obtained the following conclusions:The building of counter-cyclical capital buffer, being the core content of macro-prudential supervision, has strong practical and reasonable sense; Secondly, composite warning signal can efficaciously improve the effect of prediction and reduce the ratio of signal predicted noise which would be quite high under single indicator signal and would frequently result in false signals and missed signals; Thirdly, composite indicators perform better than single indicators, while integrated indicators are better than composite indicators; Fourthly, the best choice of the specific operation mode of counter-cyclical capital buffer is the third mode suggested by Basel Committee, which means setting countercyclical capital buffer operation range under the minimum capital requirements, contacting the warning signal indicators which accumulate capital slowly in Capital reserve Period and meanwhile release capital quickly in Capital release but without releasing all capital instantly.