Linking Bank Capital Requirements to Monetary Policy Can Improve Banking Efficiency, Writes CASS Dean of Institute of Finance and Economics
Title: Competition, Capital Supervision and Efficiency Optimization of Commercial Banks——Regard to the Impact of Monetary Policy Environment (竞争、资本监管与商业银行效率优化——兼论货币政策环境的影响)
Journal: China Industrial Economics
Authors: He Dexu, Chinese Academy of Social Sciences (何德旭), Yu Jingjing, Capital University of Business and Economics, (余晶晶), Tong Feifei, Shandong Institute of Business and Technology (仝菲菲)
Publication Date: August 2019
In this research, the authors evaluated how proposals affecting loan competition, monetary policy, and capital requirements would affect Chinese banking efficiency and risk-management practices. The authors evaluated these reforms against 2007-2016 data from 126 sample commercial banks, which represented approximately 70 percent of the total banking sector during the time period surveyed.
The authors reported that increased competition for loan prices would reduce the amount of high-risk loans that commercial banks pursue (with greatest effect on small- and medium-sized commercial banks). As competition increases, banks need to optimize their operations to maintain profit efficiency, which results in better risk-management practices, especially among higher risk-taking banks, they write.
Under different monetary policies, flexible capital requirements will affect banks differently according to their risk profiles. For example, in a loose monetary policy environment, banks with high-risk profiles will achieve optimal efficiency if capital requirements are increased; banks with low-risk profiles will achieve optimal efficiency if capital requirements are decreased. In a tight monetary policy environment, banks with high-risk profiles will achieve optimal efficiency if capital requirements are decreased; banks with low-risk profiles will achieve optimal efficiency if capital requirements are increased.
The authors recommended that regulatory authorities: 1) increase loan competition by encouraging the financial industry to make it easier for foreign firms to take greater equity positions in Chinese companies, especially in small- and medium-sized businesses, and; 2) to optimize bank efficiency, link minimum capital requirements to monetary policy, and have capital control requirements tailored to individual banks’ risk profiles.
Note: China Industrial Economics is published by the government-affiliated Chinese Academy of Social Sciences (CASS). He Dexu is dean of the Institute of Finance and Economics at CASS.