Study On The Cyclical Characteristics Of Bank Capital Buffers In China

The outbreak and spread of the global financial crisis has pushed regulatory authorities to reconsider and discuss the pro-cyclical problems of the financial system, which has been strengthened by three main external criteria of which capital regulation is one. Capital regulation under Basel Ⅱ, now proved pro-cyclical, is faced to be reformed. To this issue, the Basel Committee put forward a counter-cyclical capital buffer requirement in Basel Ⅲ.Capital buffer is an important indicator of banks’ability of risk precaution. This paper first reviews several studies on the relationship between banks’capital buffer and economic fluctuations, domestic and abroad respectively. In the limited domestic research, there’re still some disagreements on whether domestic commercial banks’ capital buffer is pro-cyclical. Some scholars have proved the pro-cyclicality, and some have found it counter-cyclical.Then, the pro-cyclical mechanism of capital regulation under the New Capital Accord is analyzed. In the measurement of credit risk, the pro-cyclicality mainly comes from external rating agencies’pro-cyclical decisions under the Standard Method and the pro-cyclical parameters in the risk weighting function under the IRB(internal ratings based) Approach. As for the measurement of market risk, its pro-cyclicality is mainly due to that when using VaR model the historical observation period is relatively short.Next, following the introduction of the current capital regulation situation of domestic banks, a quantitive analysis of the relationship between the capital buffers held by domestic commercial banks and economic cycle is given in an incomplete panel of17banks covering the period2003-2012, using one-step system GMM. The empirical results show a robustly significant positive relationship between the position in the cycle and capital buffers, and the counter-cyclicality is mainly associated with the cyclical changes of bank capital. The relationship is asymmetric during upturns and downturns. What’s more, differences exist between state-owned bank and joint-stock banks.In the end, several policy suggestions are given towards the domestic practice of macro-prudential regulation system and counter-cyclical capital requirement. Particularly, full consideration about China’s specific financial situation and differential regulation for different types of banks in different cycle stages is recommended.