Research On The Cyclicality Of China's Listed Commercial Banks' Capital Buffers

Capital buffers are defined as the excess capital adequacy ratio bank maintained at a given point in time. They are significant for commercial banks because they can help banks reduce operating costs and prevent risk effectively. By the end of 2010,Basel Committee issued the "Basel ?". Different from the first two capital protocols, "Basel ? " proposed establishing combined regulatory framework of micro-prudential regulation and macro-prudential regulation. It also promotes the establishment of a top-down counter-cyclical capital buffer mechanism. As a member of the Basel Committee, Chinese government is also explicitly proposed to "build counter-cyclical macro-prudential financial management framework" in the “12th five-year plan”. So, with the counter-cyclical capital buffer tool is gradually adopted in practice, how China's commercial banks' capital buffers move with the business cycle? Are Chinese bank' capital buffers sensitive to some heterogeneous factors,such as bank size or market power? This is the main content of this paper to study.Based on the reviews of some relevant research literatures, this paper first makes some theoretical analysis about how banks' capital buffers move with the business cycle. In this part, we also introduce the optimal decisions of capital buffers and discuss how some heterogeneous factors, such as bank size, market power, make an effect on capital buffers' cyclical performance. Based on former theoretical analysis, we do some empirical researches in fifth part. Using the data of 16 listed Banks in China over 2003-2014 periods, we examine how banks' capital buffers move with business cycle, positively or negatively? And how bank's individual characteristics influence this relationship. Our results show that China's commercial banks' capital buffers are positively correlated with the business cycle. The study also shows that strong market power tends to attenuate the positive relationship between business cycle and capital buffers. Finally, combined with the conclusions of this paper, we make some suggestions about the implementation of the counter-cyclical capital buffer regulations. Shortcomings and future research directions in this study are also summarized and discussed in the final part.