Pro-cyclicality In Chinese Banking Industry And Its Mitigation

Since2007, the outbreak of American sub-prime mortgage crisis has snowballed into a global financial crisis. During this time, both the theoretical and policy discussions on the recent financial crisis calls to address the pro-cyclical effects of regulation.The term "pro-cyclicality" in this paper is defined as the pro-cyclical effects of the new risk-sensitive bank capital regulation (Basel II), which can be described as this phenomenon:the bank capital regulation are changed along with the fluctuations of macro-economy, amplifying business cycle fluctuations. This paper will probe into the formation mechanisms of the pro-cyclicality of Basel Ⅱ and the special cases in China, based on which the policy proposals are offered.The whole paper is divided into four chapters, the contents of which are showed as follow:Chapter one, as a general framework of analyzing the pro-cyclicality of Basel Capital Accord, comes out with literature reviews.Chapter two theoretically probes into the forming of the pro-cyclicality of Basel Ⅱ, the global regulatory standard. The paper argues that the methods of measuring the risk are the main factors that affect the forming of the pro-cyclicality of capital regulation. Besides, the capital regulations amplify the business cycle fluctuations through affecting bank credits, investments and asset prices.Chapter three analyzes the pro-cyclicality of capital regulation in China. The paper estimates a logistic model of the probabilities of default (PDs) of Chinese listed firms during the period1998-2011, and uses the estimated PDs to compute the corresponding series of Basel Ⅱ capital requirements per year. Then, the paper compares the capital requirements and the GDP growth rate, and predicts that in China if the Basel Ⅱ capital regulation are adopted, the regulation will amplify the business cycle. In addition to the same formation mechanisms which are discussed in chapter two, there are there special factors in China. The first is the government factor, the second is the capital market restriction, and the third is the accounting principles.Chapter four studies the resent measures that the Basel Committee and the China Banking Regulatory Commission take to mitigation the pro-cyclicality of bank capital regulation. Combined with the facts in China, the paper offered three suggestions on mitigating the pro-cyclicality, including applicability consideration, mitigating procedures, dynamic regulation.The innovative points of this paper1. The paper estimates a logistic model of the probabilities of default (PDs) of Chinese listed firms during the period1998-2011, and uses the estimated PDs to compute the corresponding series of Basel Ⅱ capital requirements per year. Then, the paper compares the capital requirements and the GDP growth rate, and predicts that in China if the Basel Ⅱ capital regulation are adopted, the regulation will amplify the business cycle.2. The paper studies the resent measures that the Basel Committee and the China Banking Regulatory Commission take to mitigation the pro-cyclicality of bank capital regulation. Combined with the facts in China, the paper offered three suggestions on mitigating the pro-cyclicality, including applicability consideration, mitigating procedures, dynamic regulation.