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

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.