The Cyclicality Of Commercial Bank Loan Loss Provisions: Evidence From Chinese Listed Banks

The internal pro-cyclicality of commercial banks, which exacerbates the economicfluctuation and severely hurts the global financial system as well as the real economy,is considered to be one of the most important factors caused the Subprime Crisis.After the crisis the regulatory authorities all around the world have launched a seriesof regulatory measures in order to mitigate the pro-cyclicality of commercial banksand to prevent systematic risk. Unfortunately, the Basel Ⅲ has not provided a clearimplementation framework for loan loss provisioning. While counter-cyclicalprovisioning is an effective means of reducing risks of banking system and anessential part of the whole macro-prudential regulation.This dissertation analyzes the cyclicality of different components which composedloan loss provisions; makes a detail research on provisioning methods used byChinese commercial banks and on factors which influenced their loan loss provisions;then uses data of16Chinese listed banks, from2001to2012, with GMM estimation,to estimate the cyclicality of loan loss provisions of Chinese listed Banks. Empiricalresults show that loan loss provisions of Chinese listed Banks is counter-cyclical andforward-looking, and the macro-economic policies implemented in China, especiallymonetary policies, will enhance this counter-cyclical effect. At the same time,empirical results also indicate that some of Chinese regulatory rules, such as capitalrequirements and regulatory loan loss provisions, are inconsistent. Based on theseanalyses, we put forward some policy suggestions for strengtheningcounter-cyclicality of regulatory loan loss provisions in China.