Research On China’s Banking Counter-cyclical Regulation Policy

After the financial crisis, international regulatory agencies and regulatory authorities of many countries began to search shortcomings of traditional banking supervision. They all thought that pro-cyclicality of commercial banks can lead to the financial crisis, so searching counter-cyclical policy in a macro-prudential framework is very important. By analyzing the pro-cyclicality of commercial bank in China, we find out some problems of China’s pro-cyclicality regulatory, and then build the counter-cyclical regulatory framework of China. The framework is the purpose of this study. First, this paper introduced the results of previous studies and relative theory about the countercyclical policy, which include relationship between pro-cyclical and financial crisis, pro-cyclicality of commercial bank and counter-cyclical regulation policy. Secondly, the article used a lot of empirical data and models analyze pro-cyclicality of China’s commercial bank. Empirical analysis drew the conclusion that the IRB, the capital adequacy ratio supervision and fair value accounting brought pro-cyclicality to China’s commercial bank. On the basis of empirical analysis, the paper discussed the status and problems of China’s bank counter-cyclical regulation. Then, introduced some countries’ experience about counter-cyclical regulation, including dynamic provisioning, counter-cyclical capital buffer, commercial bank stress test, leverage and loan-to-value ratio. The last part proposed China’s counter-cyclical regulatory framework based on empirical conclusion, also proposed policy advices from three aspects, which include capital regulation, accounting standards and financial ratio indicators. The innovation of this article mainly has three aspects. In the first place, the paper analyzed the pro-cyclicality of commercial bank in China using KMV model. In the second place, the article found the smoothing factor λ may affect the result of the countercyclical capital buffer, and determine the appropriate value of the smoothing factor in China. In the third place, proposed some advices to improve China’s bank counter-cyclical regulation framework.