An Empirical Study on the Capital Buffer of Rural Commercial Banks in China

Abstract

As the product of China's unique economic system and economic transformation, China's rural commercial bank is a special kind of banks which is a combination of the rural credit cooperatives and stock system reform. In recent years, due to the Chinese government's emphasis on three rural issues, the rural commercial banks have experienced a rapid development in the asset size, the number of institutions, and so on. However, rural commercial banks are facing the market competition pressure and limited capital source, and therefore, experts and scholars have been concerned about how to supervise this kind of special banks. In this study, 44 of the panel data of rural commercial banks in 2010-2014 are collected and a dynamic model is adopted to analyze the behavior of capital supervision of 's rural commercial banks. The research results show that rural commercial banks have taken strict measures to supervise capital by maintaining a high capital adequacy ratio to avoid shocks of external exposures. However, the non-performing loan rate is much higher than the counterparts’, 3 times higher than that of city commercial banks in , which means there exist serious credit risks. Accordingly, this study suggests that rural commercial banks should have a correct understanding of credit risk and its control, keep the balance between immediate interests and long-term goals, make full use of peers and macro economic indexes to forecast risks, give the early warning information and guard against risks.So far few studies in China have adopted a dynamic model to deal with rural commercial banks, so the findings in this study are more valuable and can provide more constructive suggestions to help implement the Chinese government document issued recently to speed up the innovation of rural financial system.