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An Empirical Research on the Impact of Capital Adequacy Ratio on Credit and Economy

Author: LiuShouPeng
Tutor: WangQingShi
School: Dongbei University of Finance
Course: Quantitative Economics
Keywords: capital adequacy ratio panel data model VAR
CLC: F832.4;F124
Type: Master's thesis
Year: 2011
Downloads: 14
Quote: 0
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Abstract


Finance is the core of modern economy, and Commercial Banks play a dominant role in the financial system of China. There is risk in the process of credit creation, and the capital plays a significant role in the stable operation and risk-taking, so the regulation of capital adequacy ratio gradually becomes the core of prudential banking regulation, which throughout the process of market entry, continued supervision and market exit. In this paper, we make an empirical study of the influence caused by the regulation of capital adequacy ratio on the credit of Commercial Banks and the economy. From the micro perspective, in order to meet regulatory requirement, banks must hold enough capital reserve to reduce operational risk. From the macro perspective, in order to meet the regulation requirements continually, banks usually have to readjust assets structure, such as decrease the assets of high risk. The reasons given above can cause the supply of bank loans under restrictions, change the equilibrium and distribution of credit market and have an effect on economic growth.The main content of this thesis are arranged as follows:Firstly, this paper analyzes the influence of the regulation of capital adequacy ratio on the credit and the economy from the theoretical perspective. On one hand, the writer uses Kopecky-VanHoose’s credit model to analyze the best credit behavior of Commercial Banks under the regulation from the microcosmic view, and discuss the different response of the banks to the different capital adequacy ratio, including the real capital ratios are above or below the regulatory requirements. On the other hand, this paper uses CC-LM model to analyze the influence of capital regulation on the economy, and discuss the actual output when the real capital adequacy ratio is above or below the regulatory requirements.Secondly, this paper makes an empirical study of the influence caused by the regulation of capital adequacy ratio on the credit of Commercial Banks and the economy. On one hand, we choose 14 Commercial Banks as a sample, then uses panel data model to analyze the regulation of capital adequacy ratio on the credit behavior. First, we use make a regression model of the whole sample in the whole period, and discuss the dynamic changes of the credit behavior. The regression shows that deposit growth rate is an important reason to explain the volatility of loan growth rate. The effect of capital regulation on loan growth rate turns out to be asymmetric. Then, we divide the whole period into two periods, one is from 1996 to 2003, the other is from 2004 to 2010. At the same time, we analyze the credit behavior in the different period separately. We also divide the whole sample into two teams, one is state-owned bank, and the other is equity commercial bank and we discuss the different response of the different types of banks to the regulation. Compared with state-owned banks, the loans drop speed of commercial banks is 2.5 times as much as state-owned banks’.On the other hand, we choose the quarterly data of the commercial banks and use VAR model to analyze the influence of the regulation on the credit and the economy. At the same time, we also discuss cointegration relationship between capital adequacy ratio, credit, GDP and other indexes.Finally, according to the results of the theoretical analysis and the empirical study, we put forward some policy suggestions.The innovations of this thesis are as follows:Firstly, many domestic scholars use the real capital adequacy ratio or a simple dummy variable to represent the restraint of capital adequacy ratio. But this paper use gap and two-way gap dummy variable.Secondly, after the establishment of CBRC in 2004, the capital regulation entered the overall implementation phase, so we design a variable named reform to reflect the effect of this change on banks’credit behavior.The main shortcoming of this paper lies in the samples we choose don’t include city commercial banks, so we cannot analyze the impact of capital regulation on the credit behavior of city commercial banks.

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