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Bank capital buffer decisions under macroeconomic fluctuations: Evidence for the banking industry of China

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  • Huang, Xian
  • Xiong, Qiyue

Abstract

This paper focuses on the capital buffer decisions of banks under fluctuations of business cycles and the channels through which countercyclical capital buffers may affect the macroeconomy of China. A one-step GMM estimator is applied to test the above-mentioned topics using a dataset of 45 commercial banks in the 2000 to 2010 period. The findings indicate that (1) capital buffers countercyclically fluctuate over the business cycles, which is different from evidence in developed economies; (2) countercyclical capital buffers are mainly built up by increasing the numerator of capital ratio; (3) credit growth takes on a countercyclical feature, and capital buffers help enhance its countercyclicality; (4) deposit premium is negatively related to capital buffer, and this effect is stronger during economic downturns; and (5) capital buffers are less effective in affecting loan premiums regardless of the business cycles.

Suggested Citation

  • Huang, Xian & Xiong, Qiyue, 2015. "Bank capital buffer decisions under macroeconomic fluctuations: Evidence for the banking industry of China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 30-39.
    • Handle: RePEc:eee:reveco:v:36:y:2015:i:c:p:30-39
    DOI: 10.1016/j.iref.2014.11.005
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    Cited by:

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    3. Gombola, Michael J. & Ho, Amy Yueh-Fang & Huang, Chin-Chuan, 2016. "The effect of leverage and liquidity on earnings and capital management: Evidence from U.S. commercial banks," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 35-58.
    4. Samina RIAZ & Venus Khim-Sen LIEW & Rossazana Bt Ab RAHIM, 2019. "The Impact of Business Cycle on Pakistani Banks Capital Buffer and Portfolio Risk," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 57-71, March.
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    6. Lin, Karen Lai Kai, 2020. "The Cyclical Patterns of Capital Buffers: Evidence from Japanese Banks," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 53(1), pages 49-68, February.
    7. Jiang, Hai & Zhang, Jinyi & Sun, Chen, 2020. "How does capital buffer affect bank risk-taking? New evidence from China using quantile regression," China Economic Review, Elsevier, vol. 60(C).
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    9. Syed Moudud-Ul-Huq, 2021. "The Impact of Business Cycle on Banks’ Capital Buffer, Risk and Efficiency: A Dynamic GMM Approach from a Developing Economy," Global Business Review, International Management Institute, vol. 22(4), pages 921-940, August.
    10. Sunil Mohanty & Hong-Jen Lin, 2021. "Efficiency in China’s Banking Sector: A Comparative Analysis of Pre- and Post-Basel II Eras," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 24(02), pages 1-29, June.
    11. Simona Malovana & Martin Hodula & Josef Bajzik & Zuzana Gric, 2021. "A Tale of Different Capital Ratios: How to Correctly Assess the Impact of Capital Regulation on Lending," Working Papers 2021/8, Czech National Bank.
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    More about this item

    Keywords

    Capital buffer; Loan growth; Deposit premium; Loan premium; Macroeconomic fluctuation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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