Banks’ Capital Buffers In China: Impact Of Business Cycle And Income Structure Changes

After the global recession caused by American Subprime Crisis, Basel Committee formulated the Basel with countercyclical capital buffer requirement. It results in researchers studying the relationship between the business cycle and banks’capital buffers. This paper focuses on this topic, and it refers to the model of Ayuso (2004) Since non-interest income has increased quickly in China, this paper also includes income structure variable in the model.After analyzing semi-annual data from 2004Q4 to 2013Q2 of 16 Shanghai or Shenzhen listed banks with GMM method, I find China’s banks’capital buffers are significantly and positively related with business cycle. When GDP growth rate increases by 1 percent, the banks’capital buffers will increase 0.21 percent, and this characteristic is more obvious in Share-Hold Banks. The rapid increase of non-interest income is significantly negative with banks’ capital buffers. When non-interest income rate increases by 1 percent, the banks’capital buffers will decrease 0.035 percent. The most important determinant of banks’ capital buffers is the previous capital buffer level of the bank, and this variable is positive with the dependent variable. When it comes to the relationship between Return of Equity and banks’ capital buffers, the income effect is more important than the cost effect in China. The impacts of non-performing loans rate and bank sizes on banks’capital buffers are not significant.For Chinese banks, maintaining the trend of changes in capital buffers is conducive to smooth fluctuations of the business cycle. China Banking Regulatory Commission (CBRC) should design implementing rules of countercyclical capital buffer in accordance with our country’s conditions. The increase of non-interest income is negatively related to banks’ capital buffers, so it is strategic for banks to expand their intermediary business, but they should pay attention to various problems in the process. Since the previous capital buffer is the most important determinant of current capital buffer, it is necessary for CBRC to improve dynamic monitoring mechanism, which will help to detect problems in time. Banks with different ownership structures have some differences in determining capital buffers, regulators may consider implementing targeted regulatory policies on various banks.