Research On The Relationship Between The Economic Fluctuations And The Capital Buffers Of The Commercial Banks Of China

The financial crisis in 2008 has triggered profound reflections on bank capital regulation. It is widely believed in academia that the potential pro-cyclicality of Basel II is responsible for this crisis, which cannot be ignored. Thus, national regulatory authorities has achieved consensus on implementation of countercyclical capital regulation. Basel Ⅲ was formally introduced in 2010, which explicitly announced that banks should implement countercyclical capital buffer mechanism; that is, banks ought to raise capital buffers in economic boom, curbing excessive credit expansion. And they should reduce capital buffers in economic downturn so as to maintain regular credit supply capacity, relieving economic decline. Though the counter-cyclicality capital buffer instrument is being actively attempted, there’re no clear conclusions about the relationship between bank capital buffers and the economic cycle. Additionally, domestic research on this issue is limited. Therefore, analyzing the relationship between economic cycle and bank capital buffers in China is of great significance, which will help achieved reasonable application of capital buffer adjustment mechanism and enhance the effectiveness of counter-cyclicality capital regulation.The article mainly adopts a combined method of theoretic analysis and empirical research in order to study on the relationship between bank capital buffers and economic fluctuations. Based on relative research home and abroad, this article carries out theoretic analysis from three aspects, the motivation of banks holding capital buffers, the model for optimal capital buffers and the effects of capital buffers on economic fluctuations. Especially though analyzing both direct and indirect channels of the impact of capital buffers on economy, it reveals that the positive co-movement of capital buffers and economic fluctuations would relieve the pro-cyclicality of capital regulation and decrease economic volatility, and vice versa. Based on theoretic analysis, this article selects fourteen listed banks’semi-annual data from 2005 to 2012, respectively investigates the cyclical behavior of capital buffers in all sample banks, banks of different ownership and different levels of capital adequacy ratio, and then analyze the driving forces of the cyclical behavior of bank capital buffers from "numerator" and "denominator" aspects. At the same time, it explains the empirical results combined with the development situation of domestic banking industry. Relative policy recommendations are put forward in the end.The main conclusions are as follows:First, the capital buffers of domestic listed commercial banks behave counter-cyclically throughout the study period. The result mainly arises from "numerator" effect, namely bank capital adjustments account for this. What’s more, core capital plays a major role in the whole capital. However, "denominator" effect, the risk weighted assets perform non-cyclically. Overall, the counter-cyclicality arises from the special market environment and development context. Second, the capital buffers of state-owned banks are more counter-cyclical than that of joint-stock banks. Moreover, their capital and risk weighted assets also behave more counter-cyclically compared with joint-stock banks. Third, banks with high capital buffers perform particularly counter-cyclically in contrast with banks with low capital buffers. The capital of the former is more counter-cyclical, but the risk weighted assets are non-cyclical. And the risk weighted assets of the latter are obviously pro-cyclical.