Is Bank Capital Procyclical In China?

Pro-cyclicality of financial institution is a big problem to Macro-prudentialadministration. As its core content, pro-cyclicality of capital regulation of Baselaccord is also well known. Positive relationship between capital ratio and economiccondition makes capital regulation pro-cyclical. When economic is booming, bankswill reduce their capital level and expand credit. When gloomy time comes, bankswould like to put up capital level and shrink credit. The situation strengthens creditgranting and push economy too hot or too chill.Basel committee has been trying to alleviate procyclicality of capital regulation.Basel Ⅲ has developed a count-cyclical frame which includes several popularpolicies and tools. The committee suggests that it would be wise to use them basedon national condition. However, before carrying out policies, it is important for acountry to know whether capital pro-cyclical problem exists or not.this paper tries to answer the question” Is capital adequacy ratio of commercialbanks in china pro-cyclical?”. First, analyses capital procyclical mechanism in theory,then, identifies capital regulation used in china and explores current capital level ofbanks. At last, tries to find out whether bank capital procyclical or not in empiricalmodel. The model is based on capital model of Ayuso2004and is extended to fitsituation in china. In detail, the paper uses an unbalanced panel data from2005-2012from29chinese listed commercial banks.the empirical result shows that the answer depends. Different kinds of banksperform differently. State-owned banks show no evidence of cyclicality of theircapital adequacy ratio, while nationwide joint-stock commercial banks showsignificant procyclicality. what’more, surprisingly, city commercial banks showsignificant character of counter-cyclicality. The paper gives some adequateexplanation and also advises government to implement regulations differently.